SGH Limited (SGH) Earnings Call Transcript & Summary

Good morning. I'm Kerry Stokes, Executive Chairman, Seven Group Holdings. Welcome to this Virtual Annual General Meeting of Seven Group Holdings. There is a quorum. I'm pleased to declare this virtual meeting open. First, let me introduce the members of the Board: Managing Director and CEO of Seven Group Holdings, Ryan Stokes; Annabelle Chaplain; Terry Davis; Kate Farrar; Chris Mackay; David McEvoy; the Hon. Warwick Smith; and Richard Uechtritz. SGH is undergoing process of Board succession and renewal over the last couple of years, allowing us to create a Board of outstanding individuals who have worked constructively together to help guide in repositioning the consequential growth at SGH. Each director brings a range of personal, professional experiences and expertise to the Board. The Board seeks to achieve an appropriate mix of skills, tenures and diversities, including a deep understanding of the industries in which we hold investments and operate as well as operations and corporate management. Financial and safety matters, independence and government -- governance experience are also critically considered. The Board reviewed its composition to ensure it remains appropriate for SGH, having regard to our conglomerate structure, including gender diversity, director tenure and industry experience. It concluded the group is best supported by retaining all the serving directors, whilst continuing to introduce next wave of talented directors. We're joined by our company Secretary, Warren Coatsworth. Representatives from the auditors of the company's financial statements for the year ended 30th of June 2020, Deloitte, are also present in today's meeting. There are 2 key milestones to celebrate this year. First is the creation of Seven Group a decade ago, which has grown substantially since that time. The second is WesTrac having celebrated 30 years of operations in Western Australia and 17 years in New South Wales/ACT. During the year, the Board and management undertook to update our purpose as a conglomerate holding company to better articulate what we work to achieve. By recognizing and serving exceptional businesses, our objective is to maximize return to our shareholders through long-term sustainable value creation. Through the objective of maximizing returns to stakeholders, we are focused on how our activities support the interest of our shareholders, employees, customers, business partners, the environment and the communities in which our diverse set of businesses operate. To allow us to achieve this purpose, we rely on outstanding people, operational excellence and a commitment to delivering financial returns while optimizing the group's assets. These pillars have been seminal in supporting the team to deliver a strong result despite the extraordinary disruptions all businesses experienced during the year '20. During the year, the Board recognized the devastating impacts of the bushfires. The loss of life, property and wildlife, destruction of whole communities was heartbreaking. The voluntary effort of our committed employees who utilized their own personal leaves to serve in the RFS and other volunteer services to fight the fires and provide community support inspired the Board to pledging $5 million to directly support firefighting efforts, disaster recovery and the long-term task of rebuilding communities infrastructure whilst supporting the mental health of those impacted. In addition, I mentioned SGH's contribution with an additional $5 million commitment. The group was uniquely positioned to provide not only financial support but also the equipment and the services required by the RFS and communities to support the firefighting and subsequent recovery and rebuilding effort. Turning to the financials. I'm delighted to present to you another year of outstanding achievement by the whole company. The group delivered growth in revenue, underlying EBIT and cash flow. I'm buoyed by the strength and resilience of our conglomerate operating model. It was further exemplified through COVID-19, where our diversity was a core strength. Through these challenges, our leadership responded with nerve center the group and a very dynamic management to ensure we could protect our people and support our customers. The successful response highlighted the effectiveness of our operating model. Overall, the group benefited from continuing growth in mining production, including planned expansions in iron ore, and ongoing state and federal government investments in infrastructure. Results reflect the diversification of our portfolio, our financial discipline and our commitment to stated -- our commitment to our stated objective of maximizing return to shareholders through long-term sustainable value creation. We've done this with 21% per annum TSR over 3 years to 30 June 2020. Reflecting on the complex and unexpected challenges of 2020. I'm so proud what our people have accomplished for our customers, our communities and acknowledge their flexibility and agility to respond to these crises. Our strong performance enabled the Board to declare fully franked dividend of $0.21 per share. Total dividends for the year '20 were $0.42 a share. Reflecting on shareholders' questions from last year's AGM, the Board gave due consideration to increasing the dividend but elected to use the increased cash flow to support the group's investment in Boral. In this regard, we're confident that the strategic investment will represent further value to you, SGH shareholders. In delivering its year '20 results, the company has achieved improved returns in 2020, reporting underlying EBIT of $740 million and the underlying EBITDA cash conversion of 82%. Your Board is optimistic about the outlook of the company. Notwithstanding the challenges and economic concerns around the globe, the group's businesses hold leading market positions supported by strong balance sheet and financial discipline, enabling us to compete and take advantage of growth opportunities. On behalf of the Board, I thank our staff and our shareholders for your continuing support and commitment to your company. Together with over [ 5,000 ] employees, we continue to adapt to the ever-changing market and ensure our businesses remain strong and competitive. On that, I'd like to invite Ryan Stokes to address you.

Thank you, Chairman. Let me extend my welcome to you, our shareholders, to the Seven Group Holdings 2020 Virtual Annual General Meeting. In this year of unique challenges and extraordinary events, keeping people safe is our top priority, and we continue rolling out initiatives to drive safety culture and leadership. This has seen a 38% reduction in the LTIFR and 37% reduction in the TRIFR across the group during the year. It's pleasing to see the progress is continuing. We directly employ more than 5,800 people, and we are investing in training and culture transformation programs to ensure they have the skills and leadership capabilities to continue delivering value to our customers and you, our shareholders. Pleasingly, the Built By Us safety culture program at WesTrac was formally recognized, receiving the Enterprise Safety Program Initiative Award at the 2020 Australian Workplace Health & Safety Awards. Our values of respect, owner's mindset, courage and agility define us, help us determine our priorities and guide our actions to drive our decisions. Whilst respect, courage and agility are self-evident, owner's mindset requires explanation. This embodies the entrepreneurial spirit inspiring us to embrace risk and then manage it effectively. Creating an open and inclusive culture where our people feel valued continues to be a strategic imperative. Strong engagement results reaffirms that we're making good progress. I'd like to call out the great work by our people assisting their communities and fighting the bushfires earlier this year. As outlined by the Chairman, on behalf of our employees and shareholders, SGH committed $5 million to communities affected by last summer's tragic bushfires. To date, we have contributed $3.2 million of the pledged amount with the remainder to be contributed during FY '21, focusing on the rebuild efforts. The Board also elected to recognize all our people through a $300 gift card to acknowledge their contribution to supporting our customers and ensuring our businesses continue to deliver. SGH is a leading operating investment group with total assets of $7.5 billion. The group has investments in exceptional businesses with market leading positions. We own WesTrac, one of the world's leading Caterpillar dealers; Coates Hire, the largest rental services company in Australia. You will note that the addition of a new segment this year of building products and construction materials through the acquisition of a 20% stake in Boral. We are excited to leveraging the group's exposure to the continuing infrastructure investment cycle. We also invested in energy through Beach Energy and our own oil and gas assets and media through Seven West. Our results reflect the solid performance of our operating businesses. During the year, the group delivered 12% growth in trading revenue to $4.6 billion and 2% growth in underlying EBIT to $740 million. This represents 6.5% growth on a reported FY '19 underlying result pre-AASB 16. The group is benefiting from continued growth in mining production, including planned expansions at iron ore and ongoing state and federal government investment in infrastructure. Our industrial services portfolio has delivered sustained growth, with underlying EBITDA up 13%. WesTrac delivered revenue growth of 15% and underlying EBIT growth of 22%. Coates revenue and underlying EBIT were marginally higher than FY '19 despite the COVID-19 challenges. Beach's contribution to the group underlying result was down 17% given the oil price volatility in the second half of the year. Seven West continued the transformation journey through the year, however, it was impacted by the reduction in advertising markets in Q4. During the year, we declared a fully franked ordinary dividend of $0.42 per share. This year's result reflect the benefit of our diversified portfolio, our financial discipline and our commitment to maximize return to you, our shareholders. The group has benefited over time from a strong balance sheet underpinned by our solid operating businesses and their ability to generate free cash flow through the cycle. At June 30, 2020, the group held $2.9 billion in total facilities, drawn to $2.5 billion and net debt of $2.4 billion. This includes the new investment of $464 million in Boral at that time. Since June 30, we have added almost $900 million in new facilities and increased our total limit to $3.8 billion. On 7th July, we completed a USD 300 million private placement in 7-, 10- and 12-year tranches. We have also established other facilities of approximately $375 million, including a USD 200 million note facility and a $100 million in security lending facilities. WesTrac has continued to trade strongly through COVID, with the year-to-date revenue up 11% year-on-year, with fleet deliveries for major projects underway. Parts and service demand remains robust. However, we have seen with some reversal of COVID-19 critical spares stockpiling by major customers. Ongoing WA strength is balanced by subdued coal-related activities in New South Wales. Coates revenue has been impacted by the lockdown in Victoria and the slower project commencement in New South Wales. That has been partially offset by strong growth in WA. However, management had anticipated this, have ensured the cost base is adjusted to preserve profitability. Engineering and construction demand remains strong and poised to benefit from expected acceleration of projects by government. Growing Coates customer offering sees continued development of value-added specialist services, including engineering solutions for propping, shoring and dewatering. SGH was attracted to make an investment in our market-leading building products and construction materials business with exposure to infrastructure, with potential to improve returns through operational and strategic changes. The dislocation in Boral share price provided an opportunity to build a substantial interest. SGH now owns 19.98% of Boral with an all-in weighted average cost of $3.48. The expected growth in infrastructure activity will support our growth aspirations in Boral and Coates, who are both expected to benefit from acceleration of projects due to the recently announced federal government infrastructure investment focused on shovel-ready projects. Our focus is now to support Boral management to rationalize their portfolio, improve operating performance and restore earnings and value. With energy, over the next few years, demand for East Coast gas is expected to rise, while supply is forecasted to fall, requiring projects to be developed, benefiting both Beach and SGH Energy. The LNG export market is also expected to recover, providing opportunities to Beach and SGH Energy's projects in WA. Despite COVID-19 impacting global oil prices due to demand shocks, Beach is well placed for low energy prices, being a majority gas producer with minimal spot price exposure and at the low end of the cost curve. Beach is expected to generate $2.1 billion in cumulative cash flow, which, combined with its existing balance sheet strength, leaves it in a good position to develop existing reserves and resources. The Seven West strategy is focused around 3 core areas: content-led growth, transformation of the operating model and cost base, and improving the capital structure. The new content strategy is delivering ratings improvement and BVOD audience growth. Transformation will be a continued focus. The group's key operating businesses have performed strongly despite the COVID-19 disruption. The 3 key themes of mining production, infrastructure investment and domestic gas demand continue to provide growth opportunities over the medium to long term. WesTrac is delivering significant customer fleet orders through FY '21 and is on track for FY '21 high single-digit underlying EBIT growth on FY '20. Coates is expected to rebound in the second half, with reduction in COVID restrictions in shovel-ready projects coming onstream for FY '21 underlying EBIT low single-digit growth against FY '20. Beach has outlined its guidance for EBITDA to be down on FY '20. They have a proven strategy for targeted growth in production and reserves. Seven West is accelerating its transformation agenda and content-led growth strategy. On that, I'll now hand back to the Chairman.

Thank you, Ryan. We'll now attend the business of today's meeting. The notice convening this meeting has been in my hands for some time. I'll take the notice as read unless there is an objection. If as a holder of ordinary shares or a proxy or authorized representative you would like to ask any questions, I'll take written questions using the Lumi AGM platform during the course of the meeting, which relate to resolution being put. Questions related to general business will be taken at the end of the meeting. I ask you to direct all questions to me. Some questions might be amalgamated if we receive multiple questions on the same topic or resolution. Voting today will be conducted by way of a poll on all items of business. Accordingly, in my capacity as Chairman and in accordance with the constitution, I demand a poll be taken for items 2 through 6. In order to provide you with enough time to vote, polling on these resolutions is now open. The voting icon is now visible on the Lumi AGM platform. Selecting this icon will bring out the list of items and present you with voting options. To cast your vote, simply select one of the options. There's no need to hit submit or enter button as the vote is automatically recorded. You do, however, have to the ability to change your vote up until the time I declare voting closed at the end of the meeting. Results of the voting will be concluded once voting is closed, will be released to the ASX later today. So please look out for the ASX release to see the results. Before each resolution is put in the meeting, display on the screen the count of proxies as directed on the proxy form. As Chairman, I propose to cast all available undirected proxies in favor of each resolution. As you will see from the screen displays, a significant number of our shareholders vote by proxy. Those proxy counts reflect the ballot proxies lodged by the deadline stipulated in the Notice of Meeting. Before each resolution is put to the meeting, we'll display on the screen, the count of proxies as directed on the proxy form. Now deal with item 1, financial statements. First item of businesses to lay before the meeting the financial statements and report of directors and auditors for the year ended 30th of June 2020. There is no requirement for a formal resolution on this item, so this item will be excluded from the proxy form and will not be voted on. Have there been any questions submitted on the annual accounts for the year under review?

Chairman, there are no questions at this stage.

Thank you. Items 2 to 4, election and reelection of directors. The next 3 items of business relate to reelection of directors. No nominations were received by other persons. Chris Mackay, Warwick Smith and I retire by rotation and offer ourselves for reelection. As item 2 relates to shareholder consideration of my reelection on the Board, I'll now hand over to Terry Davis.

Thank you, Kerry. The first director candidate offering himself for reelection is Kerry Stokes, who is retiring and being eligible offers himself for reelection. Mr. Stokes brings extensive business experience and success to the Board, having been involved in investing and managing a broad range of businesses in Australia and overseas for more than 4 decades. His leadership attributes and his detailed understanding of your company's operations, including across areas of heavy equipment hire, industrial services, property and construction, mining, oil and gas exploration, and media are so invaluable to the company. Have there been any questions submitted on this matter?

There are no questions submitted on this matter.

You will note the proxies lodged for this resolution appear on the screen. Thank you. As the Chairman has directed, a poll will be taken on this resolution at the end of the meeting. Kerry, you may care to manage the remaining items of business.

Thank you, Terry. The reelection of Chris Mackay. Second director to offer himself for reelection is Chris Mackay. He retires by rotation and being eligible, offers himself for reelection as a director of the company. Mr. Mackay has a track record of building shareholder value as a senior corporate executive, business founder and leader and company director. A former investment banker and corporate and banking lawyer with broad experience in financial and corporate sectors over many years, Mr. Mackay has a deep knowledge of business management, capital allocation, risk management and investment. He brings this mindset and expertise to his role on the Board and its committees. Mr. Mackay is a member of the Audit and Risk Committee and a member of the Independent & Related Party Committee. Are there any questions submitted on this matter?

Chairman, there's been no questions in relation to this matter.

Thank you. Poll will be taken on this resolution at the end of the meeting. Reelection of Warwick Smith. Third Director to offer himself for election is Warwick Smith. He retires by rotation and being eligible, offers himself for reelection as a director of the company. Mr. Smith is a highly credentialed and experienced company director, corporate executive with a broad range of expertise across public and private sectors. He brings a deep knowledge of government, regulatory, financial banking and commercial matters to the Board. His business acumen and leadership attributes are invaluable to the Board and management as are his insights in relation to corporate strategy and investment, financial and nonfinancial risk, people management and executive leadership. Mr. Smith is a member of the Audit and Risk Committee and a member of the Remuneration and Nomination Committee. Are there any questions submitted on this matter?

Chairman, there have been no questions submitted on this matter.

Thank you. As I've directed, a poll will be taken on this resolution at the end of the meeting. Item 5, the remuneration report. The fifth item of businesses is to adopt the remuneration report of the company financial year ended 30 of June 2020. Despite the economic and social challenges, '20 has -- was a year of solid performance of the group, support of our people alongside the capability of the executive management team to lead and execute decisive actions as well as strong business outcomes in a particularly challenging environment. All remuneration decisions with respect to year '20 were carefully considered by the Board, taking into account the current environment and ensuring alignment of outcomes with shareholders' interests and expectations of the community ]. Incentive outcomes disclosed in the remuneration report are commensurate with the delivery of strong financial and nonfinancial results reflected in the financial performance of the group despite the economic and social challenges. It's important to note that no year '20 STI targets or LTI vesting outcomes were adjusted for the impact of COVID-19 during the year. And SGH or its wholly owned businesses have not accessed any JobKeeper or welfare payments. For the year '20 LTI award, the Board committed to an introduction of 2 performance measures of earnings per share and relative TSR. However, the uncertainty around setting long-term financial targets in light of COVID-19 and taking into account stakeholder views, the Board determined the retention of relative TSR as a single measure is more appropriate as we continue to mature alignment between shareholder returns and reported outcomes in the period of significant disruption. I welcome questions on the remuneration report for the year under review. Are there any questions on this item?

Chairman, there's a been question submitted by the Australian Shareholders' Association. ASA highlight they'll be voting against the remuneration as the remuneration framework emphasizes short-term performance over long-term performance with fixed annual remuneration and short-term incentives being 75%. The question posed is where is the alignment with shareholders' interests.