Saunders International Limited (SND) Earnings Call Transcript & Summary

Okay, Mark, I suggest we kick off.

Yes.

Okay. Well hello, and welcome to Saunders International Investor Webinar for the half year period 31 December 2024 or H1 FY '25. My name is Glen Zurcher. I'm supporting Saunders with Investor Relations and will be hosting the call today. I'm joined by Mark Benson, CEO and Managing Director and his team. The procedure today will be to walk through the presentation of results. The information can be found on the ASX platform lodged last week. Following the presentation, we'll move into Q&A. I will now hand over to Mark.

Yes. Thank you, Glen, and welcome, and thank you for joining today's investor webinar. I'm pleased to present Saunders' H1 FY 2025 financial results and provide an update on our performance, strategic direction, growth opportunities and outlook. I'd like to begin by acknowledging the traditional custodians of the land on which we meet today and pay my respects to their elders past and present. As Glen mentioned, I'm Mark Benson, Managing Director and CEO of Saunders, and I'm pleased to be joined today by Angelo De Angelis, our Chief Operating Officer; and Alex Dunne, our Chief Financial Officer. Saunders is a multidisciplined Australian company delivering engineering, construction and industrial asset services across the complete asset life cycle. Saunders is proudly Australian, and we have operated since 1951 and listed on the ASX since 2007. Our portfolio of projects blends traditional construction and annuity style contracts. We serve our clients in 4 key markets: Defense & Government, Energy, Water and Resources & Industrial. We partner with some of the world's largest energy companies, Tier 1 contractors and all levels of government. And our core capabilities, as you'll see on the right-hand side, include bulk liquid storage and transfer, structural mechanical and piping, industrial automation and electrical, civil infrastructure and industrial asset services. Saunders has a national team and 8 offices across Australia. We have operations in Papua New Guinea, New Zealand and the Saunders One Team of over 500 employees. We are well positioned to meet diverse client needs while maintaining high standards of quality and safety. On the screen, you'll see our substantial shareholders, and we welcome the Ahrens Group to our share register. Our interim dividend was declared at $0.02 fully franked, which was the same amount for H1 FY '24. This graph shows our consistent dividend paying history. Saunders has evolved into a multidisciplined business as outlined in our strategy. Recent acquisitions have integrated well across operations, systems and culture, allowing us to offer an end-to-end service to our growing client base. And examples of this are the Kalgoorlie Consolidated Gold Mines, AGL, Aqua Metro and APA. We have announced in our outlook that we have seen some projects delayed across H1 FY '25, and I will provide further color later in this presentation. But first, I would like to focus on the good performance of H1 and the great work and efforts of our Saunders One Team have delivered. We've had a record result for the half year following a strong full year FY '24 performance. H1 FY '25 revenue was $126 million, up 21% on H1 FY '24, and that was driven by our core business and a full year contributions from our 2024 acquisition. EBITDA of $9.9 million, up 1.2% on the prior year. Profit after tax of $5 million, up 2.2% on the prior year. And earnings per share of $0.0427, which was down 4.9% from the prior year, which was $0.0449, and an interim dividend of $0.02 fully franked, as previously mentioned. We have a strong pipeline of $2.3 billion, up 15% from the last reported figure at the 31st of July '24, and I'll provide some further information on this later in the presentation. In regard to our corporate highlights, the Piping Solutions acquisition was completed in December '23, strengthening our defense capability and reaching its maximum earnout cap as a result of strong business performance. The acquisition has integrated well from an operational systems and cultural perspective. Our Reflect Reconciliation Action Plan, which we finalized in July '24, reinforced the Saunders' ESG and reconciliation commitments. This is available for viewing on our website under the Investors section. Our Perth office opened in 2024 and secured an announced contract for $31.5 million in Western Australia. And Western Australia is now contributing 26% of our opportunity pipeline. We had our new CFO, Alex Dunne, appointed in August 2024, bringing ASX 50 and infrastructure expertise. And we continue to maintain a high safety standard, investing in our Together for Safety programs and our Permission to Pause to underpin our Zero Harm culture. You can see by the slide, our strategy playing out quite strongly over the last 5 years with another strong performance in H1. I'll hand over to Alex, and he can run through a few of the key financial points.

Thanks, Mark. Starting off with the income statement. EBITDA for the half year was $9.9 million, an improvement on the first half of financial year 2024. The largest contribution to this was the record revenue during the period of $126,310,000, which is up from the prior period by 21%. This growth was driven by core business momentum and a full year contribution from acquisitions completed in the 2023 calendar year. You'll also notice an improvement in our tax rates for the first half of financial year 2025, now down to 30.7% compared with the 37.7% in the first half of financial year '24. This decrease in tax rates reflects the absence of nondeductible acquisition-related expenses in the current year. Moving down the page. Our earnings per share was $0.0427, which is slightly lower than the $0.0449 in half 1 financial year '24. This is mainly due to an increase in ordinary shares on issue following vendor equity consideration issued during the period. On to the next slide and now looking at the balance sheet. Net assets increased in the first half of financial year 2025 to $53,950,000. Looking into this a bit further, the cash balance closed during the period at $19,327,000, down by $480,000 on the prior period, reflecting an increase in working capital due to the 21% revenue growth. This is partly reflected in contract assets, which increased $1.5 million or 7.1% during the period, however, was offset by a $3.4 million decrease in trade and other receivables on 30 June 2024. Now looking at right-of-use assets and lease liabilities, both decreased during the period due to a rundown of current leases. Also on the other liability side, other financial liabilities decreased $1.1 million due to the contingent consideration payment for Automation IT, while the remaining $7 million for the Piping Solutions contingent consideration was made subsequently in January 2025. Now moving on to Slide 10 and looking at the cash flow statement. Cash flows from operating activities is down compared to half 1 '24, along with the cash conversion rate, and this represents a combination of impacts, including timing of cash in and cash outflows, including those in the first half of financial year '24, customer receipts and acquisition payments. Cash flows from investing activities represent the final cash payment for the contingent consideration for Automation IT of $800,000 with maximum earn-out being achieved and payments for capital expenditure were $1.2 million in the period. Financing cash outflows reflects dividends paid, net lease liability repayments and insurance premium funding during the period. This led to a strong closing cash balance of $19,327,000. That concludes my section. I'll hand over to Angelo to take you through projects.

Thank you, Alex. Good morning and good afternoon, all depending on where you are in the country. The following 3 slides provide some additional color about our projects secured during the period, the major projects that are ongoing and some of the projects that were completed during the period. Saunders continues to develop our pipeline for new project opportunities in each of the 4 key markets that we operate in. These project opportunities leverage both our core capabilities and our multidisciplinary expertise, and we were successful in securing 2 major projects in the period, which you can see listed there on the screen. The first of these major projects was at the Kalgoorlie Consolidated Gold Mine in Western Australia. This was a $31.5 million contract for the CIL3 Tanks Replacement project at Northern Star Resources mine site. Importantly, we continue to develop and leverage this relationship to secure additional adjacent opportunities from this new client and geographical footprint. Other major projects were secured in our Defense & Government market, delivering civil infrastructure contracts, which were largely bridge construction projects to state and local government. We announced 4 contracts totaling $20.59 million for bridge demolition and replacement projects in Singleton, Narrabri, Aberglasslyn, which is near Newcastle and Dubbo. You'll see on the right-hand side of the screen there, there were some additional secured projects, which are not exhaustive and reflect our diverse and growing pipeline. These projects demonstrate the depth and breadth of our service offering and more specifically, that we have expanded our client base in each of our 4 key markets, core capability offerings and importantly, geographical footprint. As we move on to Slide 12, in addition to the new projects secured in the period, we have a number of major projects that are well underway and contributing earnings to H2 FY '25 and FY '26. These include the Western Sydney Airport Fuel Farm in New South Wales. This is a $70 million project that's nearing completion. Wet commissioning, which is the introduction of jet fuel into the system began in February 2025. We continue to support Multiplex and Skytanking, who are the facility operator through final modifications to the facility and commissioning activities in readiness of the airport becoming operational. Another significant project is the Pelican Point Terminal expansion in South Australia. This is a $44 million contract for diesel storage negotiated through an early contractor involvement model, which doubles the fuel storage capacity for Quantem in South Australia. The project has achieved over 100,000 hours injury-free since project commencement, which we're extremely proud of. In the Energy market, we have a contract with BP Kwinana Renewable Fuels in Western Australia for refurbishing and modifying 25 fuel tanks for feedstock and biofuel storage. In February 2025, BP shelved the project, issuing termination notices to all contractors, including Saunders. Whilst in the Water sector, we have continued to develop our pipeline of opportunities and secured key contracts in New South Wales and Victoria, both on the back of deepening our relationships with key Water sector delivery partners for Sydney Water and Melbourne Water. Each of the Water projects are progressing well and are a testament to our growing geographical footprint in the Water market. We have showcased a number of projects that are completed on this slide here that were successfully completed during the period. These projects demonstrate our capability across multiple markets and regions. Additionally, many of these projects were with new first-time clients that we look to leverage for further project and long-term opportunities, highlighting our diverse expertise and national presence. I will now hand back to you, Mark.

Thanks, Alex and Angelo. Our pipeline of opportunities has grown to $2.3 billion, up 15% at the 31st of December 2024. And this is up from $2 billion last reported on the 31st of July 2024. The strong pipeline of opportunities reflects the group's strong and diverse capabilities, positioning us well across the key markets and regions. Our order book is at $170 million at the end of December '24, which excludes the BP contract of circa $24 million that Angelo previously mentioned. We had expectations of follow-on projects as part of this BP program. We'll continue to leverage our multidisciplined offering in key growth markets. With a broad customer base, we are well placed to secure larger scale integrated projects. And in Defense & Government, we see investment in modernization of fuel infrastructure is set to accelerate. In Water, there is significant ongoing investment in asset renewal programs across Australia. In Energy, there is ongoing investment in renewable energy assets that provides a platform for future growth. And in our industrial -- in Resource & Industrial, the critical minerals and fluctuating commodity prices present new opportunities, which we are seeing currently in gold. Despite our positive outlook in our key markets, we have gone through a period of project delays in H1 FY '25. And these consist of some of the common themes, which really include client budget constraints, changing operational priorities and the impact of inflation on project costs and their budgets requiring reapproval. Specifically in Defense and Energy, since the announcement of the Defense Fuels Transformation Program, which is now called the Defense Fuels Resilience Program, limited projects have progressed to the market for execution with federal government initiatives such as the Defense Strategic Review and the development of the Integrated Investment Plan causing extensive delays. This has impacted Saunders with these delays in the go-to-market of fuel infrastructure projects. In the Energy market, there are some increasing uncertainties resulting in delays in alternate fuel energy segment as we have seen with the BP Kwinana project. In other energy segments, we are currently progressing some early contractor involvement opportunities. We look at our outlook, as previously mentioned, to date, we have seen some projects being delayed across H1 FY '25 as we remain dependent on our clients' timings for project awards. Tendering activity remains high, and we are seeing encouraging signs of continued growth in our pipeline. However, due to short-term delays, along with the termination of the BP contract, we have provided guidance and expect FY '25 revenue to be in the range of $210 million to $225 million and EBITDA to be in the range of $14 million to $16 million. We have an overhead structure for growth. And as a result of these delays, at the beginning of H1, we have reviewed and actioned cost-out measures. But we expect FY '25 to return to growth, reflective of our increasing project size, our addressable market and increased pipeline of opportunities. We look at our investment highlights, and we have a strong track record of delivering growth with consistent dividend payout. Portfolio blends traditional construction contracts with annuity-style earnings. And strategically, we're well positioned as a leading multidisciplined engineering and construction and asset -- industrial asset services company, strengthened by our successful acquisitions in FY '23 and FY '24. We've got a proven ability to win and deliver sector-recognized key projects and a strong pipeline spanning Energy, Defense & Government, Water and Resources and -- sorry, Water and Resources & Industrials, which we see are all exhibiting structural growth opportunities. The business is maturing into a fully integrated offering. And with recent acquisitions successfully integrated, and they've been well received by the industry. That concludes the presentation. Thank you for your time and your continued interest in Saunders. And we'll open up to Glen for any questions to answer. And thank you.

Thank you, Mark. We've received a number of questions in advance, and we've done our best to integrate answers to those in the presentation delivered just now. For our Q&A session today, please submit your questions in written format in the Q&A function or using that function. Please note that we may consolidate questions where they're similar. We may not be able to respond to some questions if they are price sensitive in nature or if there's some issue with commercial confidentiality. So moving across to some of the questions we've already got logged in. The first question is on EPS. Mark, you might want to switch or flick to Slide 7 that shows the EPS on it, saying that the EPS performance is disappointing that it did not flow to the bottom line. EPS is going backwards -- is particularly poor, when will EPS be matching top line growth on a statutory basis?

Yes. Thanks for the question. Look, on the EPS side, we've obviously made some acquisitions and those acquisitions have performed well, but we found that the delays that I've mentioned in H1 FY '25 predominantly came from the core business. And so the core business is probably the part that is underperforming right at the moment in -- during that time and looking forward into H2, which is why we've downgraded. But we're seeing that -- what we're looking at there in the end of FY '25 and looking at a really strong outlook into FY '26, so that we see that those -- that EPS figure should continue to increase and start to match the line. Part of it is we've had our overheads set up for growth. And because of some of those projects being delayed, we've now looked at that, and we'll continue to focus on that. But we also need to keep in mind that we're very positive about the projects coming, and we need to keep the resources in the business to handle those projects.

Okay. Next question. There are at least 4 large defense fuel infrastructure-related opportunities. Can you talk about how Saunders is placed to potentially win some or all of these tenders?

If you look at our track record in the hydrocarbon defense fuel side, we've been fairly successful over the last several years. We have produced or we have constructed 4 out of the 6 cut and cover tanks, and there's only been 6 constructed in the last 10 years. We've done 4 of those projects. It's been an area that we've been chasing now for quite some time. So we're well connected in what's going on in that side. And with some of those projects coming forward that have been mentioned, we're aligned with basically the majority of the shortlisted. We're aligned with 4 out of the 5 shortlisted people for some of these bigger projects.

Okay. Next question. Given that it was a major contract, why wasn't the termination of the BP Kwinana announced in February?

Yes. If you look at the Kwinana contract sitting by itself, it wasn't material when we look at what was actually being burned for the second half of FY '25. But we had a few projects even in the last weeks of February that we're expecting to be announced, I suppose, or decided what was happening with them. So we had a couple of things that happened together, which has forced us to look at the full year and the downgrade. But when it was sitting by itself, it wasn't material in our figures. And we only found out about this in late February.

Okay. What proportion of revenue is reoccurring and how do you see that changing in FY '26 and FY '27?

This -- when you talk about reoccurring revenue, it's one of those definitions in the industry that I think could do with a bit more words around it. Our -- probably more than 50% of our revenue currently is reoccurring with repeat clients. It doesn't mean we don't have to tender for it. But we're on panels. We've got MSAs, a lot of all the projects in our space in that hydrocarbon, we get asked to tender on every project, and we win our fair share of those projects. If you look at annuity-style contracts, when we've looked previously, it's around that 30%, which is where we're on these panels, the work comes out and we get that work. But reoccurring for us is most of our work at this stage has been coming from repeat clients. And the good news is we're starting to see a lot of new clients coming into that as we've sort of mentioned in the presentation, and we're dealing now that we've got an end-to-end service, it's opening up a lot more pipeline.

Next question. Without providing specific figures, would you say the defense sector opportunities would provide a significant step change to the financials of Saunders?

Look, there's projects in that pipeline that are material, and that would definitely be the case would give us a step change. Obviously, we've got to win those projects, but we spent a lot of time positioning ourselves to do that. There's ones now that there was a list of smaller projects that we will be able to contract direct to defense. And again, we expected those to be starting to come out to the market before Christmas. Only as recent as a few weeks ago, there was a shortlisted companies announced, which we were on that list, which is good news, but again, they've been delayed. So there's a combination of those smaller and larger ones. But definitely, the pipeline that's there and some of the work that we're talking about would make a material difference to our revenue.

All right. We have no further questions just at this moment. Perhaps we could just pause or ask for further questions. If you have a question on your mind, please submit that. Okay. Back to you, Mark, to close the session, and then I'll close out with an administrative comment.

Yes. Look, now I'd just like again to thank people that have taken the interest in Saunders, from the executive team, they're working very hard for the shareholders. And we believe our fundamentals in the business are really strong. And the activity level is strong. We've got a strong pipeline. We've got a very high level of tender activity. We're obviously winning -- still winning lots of jobs that aren't announceable. And once we see some of these more material projects start to come out, we're very confident on where we sit for FY '26. But that's probably all for me, Glen.

Okay. Thank you. In closing, please look out for the ASX Small and Mid-Caps Conference on March 26, where Saunders will be presenting, and thank you for joining the call today.

Thank you.