SGH Limited (SGH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Seven Group Holdings First Half FY '24 Results Announcement. [Operator Instructions]. I would now like to hand the conference over to Mr. Ryan Stokes, CEO and MD. Please go ahead.

Good morning, and welcome to the Seven Group Holdings Half Year Results Presentation for the 6 months ended December 23. I'm Ryan Stokes, Managing Director and CEO. Joining me today is Richard Richards, Group CFO. Slide 2. SGH is an ASX 100 diversified operating group with market-leading businesses across Industrial Services, Energy & Media. The group employs close to 15,000 people across our 5 core businesses, WesTrac, Coates, Boral, Beach Energy, and Seven West Media. Incremental capital is dedicated to our core long-term demand thematics of mining production, infrastructure and construction, and transitional energy. SGH is focused on Australian-based businesses with scale and leadership in their respective markets, with privileged assets and defendable economic modes. The disciplined execution of this investment strategy and operating model has supported the delivery of a record half-year result for SGH, led by outperformance at our industrial services businesses. Slide 3. Strong customer activity in the first half supported the group to deliver revenue of $5.4 billion, up 17%. Revenue growth was amplified with increasing operating leverage, resulting in EBIT of $764 million, up 28%, and ahead of our 22% EBIT CAGR since FY '16. Group NPAT of $474 million was up 31%. We also delivered a strong cash result with operating cash flow of $715 million, up 25%, led by cash generation at Coates and Boral. Slide 4. Investment into strategic sector exposures with demand tailwind is a core tenet of the group's capital allocation model, and the outlook for our 3 core sectors remains positive. WesTrac is exposed to mining production through the volume of earth moved. The outlook for our key bold commodity exposures like iron ore and coal remains robust. The aging customer fleet is increasing and increasing the expected demand for WesTrac products and services. Coates and Boral are orientated toward domestic infrastructure and construction investment exposed to the $1.7 trillion infrastructure and construction pipeline forecast over the next 7 years. They're also both well-positioned to capitalize on the domestic renewables build-out. Beach and SGH Energy focus on the gas and its role as a transitional energy source. We expect supply constraints in our key gas markets going forward due to the increasing demand for gas to firm up renewable generation. Slide 5. The group's purpose, objectives, values, and disciplined operating model are also key drivers of our performance. Our purpose is to recognize and serve exceptional businesses while meeting our objective of maximizing return to stakeholders through long-term sustainable value creation. We support this objective with our 4 values of respect, owner's mindset, courage, and agility. The owner's mindset is particularly important in the group context. The focus on accountability and execution that it promotes is heavily represented in the SGH operating model. The operating model has 4 core characteristics. First, each of our businesses has fully functioning board structures, holding them accountable to deliver. This reinforces a clear delineation between the group and business unit promoting absolute P&L ownership of results. Second, decision-making is pushed towards the frontline where possible, promoting a lean empowered workforce with accountability across all levels of the organization. Third, we incorporate the owner's mindset into our operating cadence, emphasizing execution and results, and prioritizing outcomes over excessive processes. And finally, the focus on a lean operating structure and accountability makes the group inherently scalable. This was reinforced with the group able to control Boral without a change to the size of our corporate office. Slide 6. The group saw a significant improvement in safety performance over the half with LTIFR of 1.3 and TRIFR of 4.5%, improving by 47% and 48%, respectively. The improvement in both metrics highlights the progress we are making, and stems from our focus on promoting a culture of safety across the group through visible leadership, accountability, awareness, and training initiatives. We have also made progress toward our sustainability ambitions. A code to the solar rollout is building momentum. At WesTrac, we're helping our customers decarbonize through the supply of more efficient machines and supporting their electrification journeys. At Boral, customer demand for recycled construction materials is growing, and Boral's recycling over 2 million tons of construction materials annually to meet this demand. Slide 7. The group delivered EBIT of $764 million, up 28%. This is the seventh consecutive year of earnings growth for the group and was significantly above our 10-year EBIT CAGR of 12%. The growth was driven by our Industrial Services segment of WesTrac, Coates, and Boral with strong customer activity supported revenue growth of 17%. Our focus on cost and operating discipline saw the collective EBIT margin across the segment expand to 13%. And driving EBIT growth of 40% to $698 million. At a group level, margin expansion of 127 basis points supported a 25% increase in operating cash flows of $715 million. The strong cash flows were utilized to support investment in working capital at WesTrac, as well as reduced group leverage by 15% to 1.9x. We have also delivered a return on equity of 17.3%. Slide 8. Other key financial results for the half included revenue of $5.4 billion, up 17%. EBITDA of $1.02 billion, up 21%, and NPAT of $474 million, up 31%. The statutory NPAT of $225 million was down 36%, as the group recognized $250 million of significant items, predominantly related to our 30% share of Beach Energy's impairment over the period. We have declared an interim fully franked dividend of $0.23 per share for the half, in line with our continued focus on deleveraging and our long track record of stable and growing dividends over time. Slide 10. Revenue at WesTrac was up 27% for the period, driven by machine sales and product support. Machine sales were up 23% with strong customer demand across resources and construction. Product support sales were up 30%, with a 6% increase in parts volumes sold to 12.4 million line items, and a higher mix of rebuild activity. The product support growth materially above our 11% 10-year CAGR. The consistent long-term growth in this revenue stream has been driven by increasing machine population and product support intensity. The average mining machine age in our territories has increased by 40% since FY '16, supporting this demand growth. Customer activity and overall demand remain robust, with increasing iron ore and thermal coal exports and a resilient infrastructure and construction project pipeline. The cost and efficiency initiatives we outlined in our full-year results are also delivering internal improvement and operating leverage. Our focus on cost discipline will continue into the second half. Slide 11. WesTrac's revenue of $2.9 billion was up 27%. Increased operating leverage delivered EBIT margin growth to 11.4%. EBIT of $333 million is up 31% and strongly outperforming the 10-year EBIT CAGR of 8%. Lower operating cash flows of $105 million reflect increased investment in parts and machines. WesTrac has invested in working capital to support high levels of customer orders and product support demand. The level of this investment reflects a committed order book, which represents over 75% of WesTrac's machine inventory position. The capital sales pipeline and customer demand for support highlight the strong outlook for WesTrac. During the period, WesTrac expanded the FTE workforce by 2% through targeted domestic and international skilled labor recruitment initiatives. The business is also investing to increase productivity with initiatives like the Component Rebuild Center, Digital Twin, and Autosar, driving higher facility and labor utilization. Slide 13. Coates has delivered a strong result for the half, underpinned by customer activity and operating leverage focus. According to the latest ABS release, the total value of construction work done was up 8.5% year-on-year to September 23. The total infrastructure and construction pipeline remains strong with over $1.7 trillion investment to the sector expected over the next 7 years. Coates is positioned to capture this pipeline with a dominant and growing 28% market share of Tier 1 infrastructure customers. While the value of work done shows overall sector activity is resilient, Coates has seen some deferral of project commencements over the half. The project pipeline reinforces that these are delayed starts, not a reduction of activity. Coates is also focused on strengthening the business through productivity and growth initiatives. In FY '24, these included the second phase of Project Equipped, which focuses on R&M and productivity benefits from branch network optimization. The business is also continuing its push into solutions, where revenue from the Industrial and Engineering Solutions business was up 10%. Slide 14. Coates revenue of $585 million was up 2%. Our focus on productivity delivered increasing operating leverage with EBIT margin of 28%. The margin improvement supported Coates to deliver 10% higher EBIT of $164 million and return on capital employed of 17.5%. EBITDA cash conversion expanded to 98%, with operating cash flow of $255 million, up 7%. Time utilization of 60.2% was marginally down, while still above the 60% high-performance benchmark for the industry. We remain focused on how we can improve time utilization as we continue to grow our fleet to better serve our customers. Our continued investment in the higher fleet saw an increase by $50 million to $1.88 billion on an original cost basis. The business is investing to expand the fleet to $1.9 billion by the end of FY '24 to support growth. Slide 16. Boral sales volumes were broadly flat in the first half, with increases in quarries and recycling offsetting a slight reduction in cement volumes. The business achieved strong price traction with mid-to-high single-digit price increases across most products, offsetting low to mid-single-digit cost increases. The ongoing internal optimization efforts continue to deliver a positive outcome with a 6% reduction in overheads in the half. Other initiatives include the focus on the drag site to improve profitability and the ongoing simplification of the core-to-cash process, both of which are delivering positive operational and financial benefits. Boral has also identified $300 million to $400 million of catch-up CapEx required over the next 4 years to strengthen the business. The investment will focus on extending quarry asset-light, replacing heavy mobile equipment, and optimizing the mix of owned versus third-party heavy road fleets. The focus for the remainder of the year is on finalizing and embedding the PMAP operating model to improve commercial, operational, and financial rigor. Slide 17. Pricing traction supported revenue growth of 9% to $1.8 billion. The pricing combined with cost focus and operating discipline delivered Boral's first double-digit EBIT margins since FY '19 with an EBIT margin of 10.9%. The significant margin improvement delivered EBIT of $201 million, up 111% against a soft comparative period. Boral also delivered a strong cash result with an operating cash flow of $346 million, up 196%. The OCF growth supported a 75% reduction in Boral's net debt position to $85 million or a $38 million net cash position, excluding lease liabilities. Boral's first-half result led to an increase in FY '24 EBIT guidance to $330 million to $350 million. The result demonstrates clear progress on the good-to-great journey, and SGH remains committed to supporting Boral to realize the full potential of the business. Slide 19. Beach Energy's underlying NPAT of $173 million was down 10% on lower production and margin compression, leading to a lower equity-accounted contribution to SGH EBIT of $52 million. Production of $8.8 million bowies was down 11% and impacted by lower output from the Otway and Taranaki Basins. The business is well-positioned to supply gas into tightening East and West Coast and global LNG markets. Beach has signed a new GSA with Origin at competitive market rates for the enterprise gas field. They have also concluded the Otway price review, which locks in a moderate price increase from CY '24. On the West Coast, construction of the Waitsia gas plant is ongoing, with planning and preparation for commissioning underway and the first gas expected by mid-CY 24. At SGH Energy, construction of the Crux project is well underway with first LNG expected in CY 27. SGH Energy is also advancing commercial studies on long-term gas asset in the Gippsland Basin, which holds an estimated 87 PJs of gas and is connected to existing production infrastructure. Slide 21. Seven West revenue of $775 million was down 5% against the 9% softer advertising market. The business was able to partially offset the soft ad market through a growth in revenue share of 41%. Seven West remains the #1 total television network in the country. Business consolidated its top position in the half with 2.2 share points growth in prime-time linear TV audiences and a 30% increase in BVOD minutes. Given the market softness, Seven West has worked to deliver cost-out initiatives and expects to realize $20 million to $25 million in savings in the second half as part of a larger $60 million ongoing cost-out program. The market share expansion and cost discipline have allowed Seven West to maintain a strong balance sheet, ending the half marginally higher with net debt of $257 million and leverage of 1.3x or 1x, excluding the ARN investment. As JT's, other media interests recorded EBIT of $3.2 million. I'll now hand you over to Richard to take you through the Group's half-year financials.

Thank you, Ryan, and good morning. The group delivered record financial results for the 6 months ended December 23. Revenue from continuing operations of $5.4 billion was up 17% on customer activity strength across our core demand thematics that Ryan has outlined. Expenses of $4.5 billion were 15% up, predominantly on higher cost of goods sold at WesTrac and Boral. The quantum of these increases in costs was lower than the revenue growth, resulting in EBITDA and EBIT margin expansion of 61 basis points and 127 basis points, respectively. EBITDA of just over $1 billion was up 21%, while D&A was largely flat at $253 million, leading to a 28% increase in EBIT to $764 million. The group's net financing expense was up 11% to $142 million, with higher interest rates on floating rate debt, partially offset by an 8% reduction in net debt. Underlying NPAT of $474 million was up 31%, while statutory NPAT of $225 million was down 36%. The differential primarily relates to the group's share of significant item losses refer to our equity-accounted businesses. Slide 24. The significant item loss of $250 million predominantly relates to impairments at Beach, Seven West, and Boral. The Beach impairment of $152 million reflects the group's 30% share of their after-tax $505 million impairment of the Cooper Basin and exploration assets. The Seven West impairment of $90 million reflects the mark-to-market of the group's interest in the business as a result of a reduction in the share price over the half. Their Project Phoenix costs and impairment of the ARN investment. The Boral impairment of $16 million stems from their 40% share in PLDC impairments of historical development costs over the period. These impairments were partially offset by a $33 million gain related to the disposal of SAC in December 23. A net tax expense of $11 million was also recognized in relation to significant items. Moving to Slide 25. This slide provides a year-on-year earnings bridge with underlying EBIT movements for each of our segments, along with a reconciliation to statutory EBIT. The $79 million or 31% expansion of EBIT at WesTrac follows top-line growth in capital sales and product support, stemming from strong machine sales, uplift in parts and service activity, and a minor part price increase effective July 23. SG&A was also refined supporting margin accretion. The $15 million or 10% EBIT growth at Coates is primarily margin-related with a slight revenue uplift, amplified in earnings through increased operating leverage delivered by lower R&M people and indirect overheads. Boral's $106 million or 111% increase in EBIT growth is also largely related to margin improvement. Pricing traction over the half more than offset mid-single-digit. COGS increases, which coupled with ongoing cost and productivity initiatives, facilitated almost doubling of EBIT margin. The $7 million decline in earnings in our Energy segment predominantly relates to the group's share of the $8 million decline in Beach's Energies NPAT. Media contribution to the group EBIT fell $22 million or 44% attributed to our share of 760 million decline in NPAT, reflecting the challenging advertising market. In aggregate, these movements led to $169 million increase in underlying EBIT to $764 million, or $528 million statutory EBIT after significant items impact. Slide 26. Underlying operating cash flow for the half was $715 million and was up 25%. The increase was supported by Boral, where higher earnings and improved working capital management delivered EBITDA cash conversion of 110%, up from 75% in the prior corresponding period. Coates cash conversion continued to be strong at 98%, helping to offset lower conversion at WesTrac, following the $270 million inventory investment to support future growth. These businesses combined to deliver 70% EBITDA cash conversion for the group, up 219 basis points on PCP. Net interest paid of $128 million was up 18%, reflecting the effect of increased interest rates on floating rate debt, predominantly our corporate syndicated facility and the Boral equity-settled swap. This was partially offset by higher interest income driven by an increase in term deposit rates for cash invested by Boral. Net income tax paid of $65 million was flat for the half, and combined with the interest impact resulted in statutory operating cash flow of $522 million, up 36% on PCP. Investing cash outflows of $144 million were 43% lower for the half, predominantly driven by the net proceeds from the disposal of Sykes, and the proceeds of the 1% sale of Boral shares at $4.90 in August. Production, development, and exploration expenditure of $61 million was flat and relates to the Crux LNG backfill project. The group's 15.5% share of development CapEx is set to increase in the second half with preparation and planning activities underway in the lead-up to the mobilization of the Transocean drilling rig to location. Net financing cash outflows of $184 million were down $532 million, with this reduction primarily relating to Boral's $629 million repayment of U.S. debt in the comparative period, partially offset by a $54 million repayment of USPP debt at WesTrac over the half. Closing net debt of $3.7 billion was down $412 million compared to December '22. The contraction in net debt follows the strong operating cash flow, more than offsetting investments in WesTrac, Coates, and SGH Energy, and the group's dividend payments. Slide 27. The group's net assets of $4.8 billion increased by $185 million over the half, reflecting higher cash and inventories, partially offset by a reduction in the value of the group's equity-accounted investment. The increase in cash stems from the strong OCF result. While the inventory increase was primarily attributable to WesTrac, where we have invested in inventories to support the committed order book. The decrease in investment value is predominantly related to the decline in the carrying values of Beach Seven West. The $117 million decline in Beach largely reflects the statutory impact loss following the impairment already discussed. The $65 million reduction for Seven West Media reflects our net share of their statutory NPAT and a $90 million impairment on a lower share price. The increase in oil and gas assets reflects the $61 million investment at Crux over the half. Other significant balance sheet movements include $56 million lower deferred income, largely related to a reduction of machine deferred income at WesTrac, and a $9 million reduction in derivative financial instruments relating to FX hedging and a comparatively favorable FX position at 31 December. These movements result in net debt of $4.7 billion or $3.7 billion, excluding lease liabilities, representing a 6% and 8% reduction, respectively. Moving to Slide 28. After adjusting for $35 million of positive mark-to-market on debt-related derivatives and $66 million of cash collateral against swaps, the group's adjusted net debt-to-EBITDA or leverage excluding leases, contracted from 2.3 to 1.9x over the half. The result highlights the group's ability to deleverage while simultaneously delivering strong earnings growth. In terms of funding, the group increased the size of the SFA by $20 million to $1.9 billion and it extended it to 2028. There are now no corporate bank facilities maturing in 27. WesTrac also completed a $410 million USPP in January, that was oversubscribed by 3.2x, demonstrating the market's confidence in our financial position and capital management strategy. At December, 46% of the group debt was fixed at an average rate of 4.6% and an average duration of 5.9 years. Finally, the Group's all-in funding cost stands at 5.5% with a weighted average maturity of 4 years. I'm going to hand you back to Ryan.

Thank you, Richard. Slide 30. SGH has a long history of delivering on operational and financial growth. This has ultimately supported superior shareholder returns. The group has delivered a compound annual earnings growth rate of 22% since FY '16 and has consistently outperformed guidance. We've achieved this growth through disciplined execution against ambitious operational targets. This performance improvement is then embedded into the businesses to drive long-term value. WesTrac and Coates's CAGRs of 17% and 18%, respectively, since FY '16 highlight how effective the SGH model is, as does a rapid improvement in Boral's margins since SGH's acquired control in FY '22. The group has also delivered on its deleveraging commitments, reducing adjusted net debt to EBITDA by 32% since the high of 2.8x when the group acquired control of Boral. This deleveraging continues to be achieved ahead of our market-committed timeline. The group's consistent growth and outperformance have delivered our shareholders over 580% total return since FY '16. This performance translates into top decile TSR across the 1-, 5- and 10-year horizons. Slide 31. The strong first-half results support upgrading the group level guidance to mid- to high-teen EBIT growth for FY '24. The upgrade was driven by outperformance from the Industrial Services segment of WesTrac, Coates, and Boral. At WesTrac, strengthening customer demand, and the first-half inventory investment underpins a positive second-half outlook. At Coates and Boral, resilient infrastructure and construction investment is expected to continue supporting customer activity. The first half result and outlook in these businesses support upgrading our Industrial Services segment guidance to 20% to 25% EBIT growth in FY '24. Our equity account of businesses Beach has guided to production of $18 million to $20 million in FY '24. And Seven West has guided to maintaining its plus 40% market share in FY '24 while reducing half 2 costs by $25 million compared to second half '23. The half-year results and full-year guidance upgrade highlight the strength and agility of the group's operating model. I want to thank our business leadership and the 15,000 people across the organization for their hard work and dedication to support our customers. At this point, I'd like to thank you for listening to the presentation and take any questions you may have. Thank you.

Thank you. [Operator Instructions]. Your first question comes from Shaurya Visen from Bank of America.

Hi, Ryan. Hi, Richard. Good morning and thank you for taking my questions. Ryan, congrats on a very good set of results. I have two questions for you, both on your guidance. First, can you give us a sense of what your guidance implies or is baking in for Boral? Is it like the midpoint of the 330 to 350 guide? And secondly, just thinking about the guidance again, if I'm getting my numbers right, even if I assume 20% EBIT growth, right? Which is at your upper end, that sort of implies second half EBIT of $660 million, which is still pretty impressive at 12% year-end growth, but obviously, a significant desolation versus the first half. I'm just trying to unpack that. Could you give us a sense of what is sort of driving this, what I think is a bit soft guidance? Thank you.

Yes. Look, the first part of the question, we take the midpoint of the borrow guidance. We think that's appropriate from an input into our guidance assumptions. So for us, the second half growth has continued into what we expect in West Track. We don't expect to double first half, which is probably a factor in that mix. But we do expect to see strong growth into the second half for WesTrac for coats and obviously, the boring pretty self-explanatory. We do provide that 20% to 25% Industrial Services growth target to give some perspective as to what we see in the core growth drivers of the business. And obviously, other attributes around Beach and some was will make up the remainder of the group guidance.

Thank you. Your next question comes from Mitch Sonogan from Macquarie.

Yes. Good morning, Ryan, Richard. Congratulations on a good result there. Just following on the guidance question, I guess, just more specifically, looking at the WesTrac to get down to that number, obviously implies a pretty material step down in the second half. So can you maybe just talk to a bit more detail about what you're seeing in that business and also what's implied in that second half? Is there some conservatism built in for things like maybe delivery slipping in the back end of the period? But yes, just digging into the WesTrac assumptions in the second half is the first question. Thank you.

Yes, I appreciate that. And look, there's -- yes, there are probably some question marks around that second half delivery. We don't expect new machine sales to match the first half, and there are probably elements around slippage of time frame. We call out in the presentation that the investment in inventory, which is a lot parts and certainly new machines as well. There -- 75% of those are committed. So that gives some indication to the confidence in that order book. The question is when they're delivered. So we expect the second half new machines to be down slightly on first half, but certainly up on prior year in aggregate. And I think the other fact that we have to manage through is just that constraint we're seeing in supply of parts for a lot of the potential demand. What we just emphasized on that is the 2 core constraints for WesTrac that we are managing through and we delivered through in the first half was how we manage through parts constraint, how we manage labor constraint. The demand from a customer perspective is there. So it's really about managing those attributes. So in reality, what we stare into in that context is probably a degree of appropriate balance in how we look at the risk to execute upon that. But the thing I'd just emphasize is that the customer demand is there. It's just how we manage to deliver on that through the second half. So I think you probably can interpret that as you probably would. But ultimately, we are very confident in the outlook for WesTrac as it pertains to a full year and still demand beyond into FY '25.

Yes. Thanks, Ryan. The second one, just quickly on Coates. Revenue up 2%, but EBIT up 10%, like another great result EBIT margins of 28%. Just on more of the next 2 to 3 years view. How much more upside do you think you can see in that business with all the operational improvements that you have underway there in the hub and spoke model, et cetera? Yes, just by level thoughts on the upside there and the outlook across the different end markets as well? Thank you.

We still benchmark against international peers and see that we're trailing on a margin perspective. So there's opportunity to drive that. The step down in utilization is obviously a key avenue for us to drive. So as we look to grow fleet and get utilization up. That is another key element of the operating leverage, which kind of we delivered this result without having that equipment utilization as an operating leverage tailwind. So we'll work with that opportunity going forward. So we are confident around the potential to drive that revenue growth into the future years, and that's going to be a key focus for us. We spoke about the project delays and what we're hearing from a number of customers around the roll-off between completion to commencement. We are here seeing a winter, a lot of feedback around that being that the labor aspect has played through into those project commencements. But we've assumed that this element will kind of reach a bit of that plateau and then gradually grow from there. So our focus is on how we can grow, share, and how we can kind of take more into that market as we go forward. But we still think that there are opportunities for growth within Coates. Part of the other focus through the half is how we continue to improve the business, and there's still more we can do. So for us, we're confident in the growth outlook for Coates. I think an increasing part of the construction mix is that rental service solution as we've seen elsewhere in the world, and that's the position that we'll look to be playing to support our customers.

Yes. Great. And just a final quick one for me, Ryan. Obviously, a strong reduction in net debt leverage is down below 2x now. Can you maybe just talk through, I guess, the brief thoughts on large-scale M&A over the next 12 months as well? Thanks guys. That's all from me.

I appreciate that. We really love the -- I think 12 months ago, kind of what you do what you did now it's what you're buying that. I think that's a great level of confidence in the SGH team's ability to execute and drive value. So I think from our perspective, we're very conscious around being disciplined in what we do around capital allocation. I think to answer your question directly, reality for us for the next 12 months, we're still focused on driving value within our core businesses, and we see opportunities to drive incremental value through that. So the investment that Boral makes on catch-up CapEx is a key case in point, we sort an opportunity where we can buy fleet assets within Coates of deploying capital there, and we'll continue to focus on deleveraging. And logically, as time plays out, if there is an incremental opportunity, the dividend is another aspect to look at. But we are focused over the next 12 months within the existing portfolio. I'd say that's kind of -- and beyond that time frame, potentially look at what opportunities may be there. But at this point in time, it's still focused on executing the core portfolio.

Thank you. Your next question comes from Brook Campbell-Crawford from Barrenjoey.

Thanks for taking my question and congrats as well on the great result. I have a question on WesTrac. This is not asking to provide guidance, I guess, beyond the current period, but putting the extraordinary performance in the first half to one side, what do you think about the medium-term sort of opportunity, what the right kind of growth rate should be at EBIT for WesTrac, just bearing in mind the historical CAGR you talked to 8%? And then looking at consensus, which looks like it's about 2% on average over the next 5 years. Do you think the historical growth rate is a good reference point you could target for going forward? Or do you think there are perhaps some reasons to be more cautious as what consensus looks to be factoring in? Thanks.

Brook, I appreciate the question. Our view is that, that CAGR we call out, we do call it over a decade. If we look over -- since FY '16, that growth rate is much stronger. So I think if you're looking at a 10-year CAGR, that is a relevant viewpoint from a WesTrac perspective. It's quite clear one of CAT's objective is how they can kind of grow the aftermarket, and they talk about that as a strategy and that focus on balancing, getting machines into territory, and working and supporting, but ultimately also price realization as well. So that's been certainly kind of a factor supporting growth. I think there's alignment for WesTrac in that strategy. The aging fleet profile and demand from customers will certainly going to support growth. So over the medium term, we are confident in the growth prospects for WesTrac just based on cost of demand activity, aging fleet profile, and what's associated with that. We think the transition to electrified fleet will take time. But for us, we think the next -- through the remainder of this decade, there's a strong opportunity to support that embedded fleet, and it's more likely that that's going to remain in situ for longer as transition to other equipment takes longer. So we think that bodes well for WesTrac, and the opportunity set. But to the core question, that history is a relevant element to look forward and predict a growth opportunity for WesTrac. We would like to be delivering that formal growth and see potential in what WesTrac can do over time in sustaining that growth. And it's one of the incredible attributes of the business, the role we play to support our customers. I think the opportunity should be there if we do that effectively.

That's very clear. And listen, you talked about it a little bit there with respect to the transition. But has there been any change when you're talking to your customers about how they're thinking about the timeline of transitioning to battery electric fleet over, call it, the last sort of 6 months or so? And did that play a part in this extraordinary growth you're seeing in demand for product support at the moment? Maybe an update really on what they're saying that timeline looked like? That would be great. Any thoughts on that? Thanks.

I think I'll probably cautious that. Well, I won't suggest that we're getting direct feedback and they're giving us insights into how their thinking that isn't public. But I think what we've seen from public commentary is around the recognition of the complexity associated with the transition and the fact that it's probably -- it's likely to take longer. So we are seeing that play through. CAT committed to meet their time frame of having machine and territory in we think probably like 25, but will be rolling around in a pilot, so it would take time to then get that into a production replacement. And I think the complexity in our view, would mean that it's not likely to see any major transition on before the end of the decade when you think about the complexity of electrifying such significant operations. So we think that aspect is probably pushing the time frame out. It means the next 5 years plus is going to be pretty strong for the existing equipment base. And we are seeing strong orders from customers on traditional fleet. So that hasn't changed their fleet profile, but probably, I'd say, rather than wholesale fleet replacements looking to blend to sustain fleets at an acceptable age profile to have them run longer. So we think it seems like a logical strategy as we'll look at the electrification journey as occurring over a period of time, but probably a longer period of time than what might have been thought a couple of years ago.

That's great. And I'll just squeeze in one last question around Boral. In the release, you do talk to disciplined capital management with respect to selling some shares in at $4.90 a share, I guess. It's done really well, right. To just above $5.80 a share. Has your view on value changed at all there, noting obviously very good results for them this reporting season, but any sort of update there on how you're seeing value in your state there? Thanks.

Good question. In hindsight $5.80 would have been better, but in reality, I think that what we still recognize we called out in the AGM, and it's great from a Boral perspective, I mean, the [ P ] multiple is a standout on the upside compared to the industry. And we think as we look through that P multiple differential between group, which is predominantly made up of the high-quality industrial services businesses. And Boral, it just doesn't seem to make sense apart from the fact there's just limited free float and Boral, and that driver to want to be in there creates a premium. But the reality is from a value context, SGH represents better value than that P. So that was the original motivation, was really around that P multiple basis. So we'll also evaluate our options to what we do within Boral, as we had said through that, we're still committed to Boral. So we'll retain control of Boral. We'll look to change our position, but our position of holding over time may fluctuate.

Thank you. Your next question comes from Joseph House from Bell Potter Securities.

Hi Ryan and Richard, congrats on the strong result update, and thanks for taking my questions. I've got two. Firstly, I'd like to know if the reported mine closures across the nickel and lithium markets have in any way impacted your WesTrac sales pipeline or if you expect them to in the near term. This question applies both to your new equipment sales and aftermarket opportunities.

Yes. As we look through that, the impact of commodity price movement on WesTrac is probably less pronounced than just the overall activity. But when it comes to project commencement or I'd say, or mine suspension those activities will play through. We haven't seen that play-through from a nickel perspective. I think those customers are far more conscious on cost and efficiency of their operation. I think it probably -- just as we look through that, we still see a demand thematic for battery minerals, which is going to play out over many years and decades. It's going to create a huge amount of demand and support that supply coming on. And while prices might fluctuate, I think what we'll see is the more efficient, more cost-focused kind of operations get up and get into production. And they're usually going to be the large open-cut efficient operators in lithium and nickel, and we certainly believe there's a strong role for WesTrac and supporting those operations, and still very confident in the positive outlook from a lithium and nickel context into the criticality support electrification. So we feel confident with the short-term, there's proven some delays to decisions on investment, and potentially kind of suspension, but not a material impact on the kind of operations at WesTrac. So we haven't seen that play through from any form of financial impact. I mean, if you think through the volume of those moved in iron ore. So it's greater than anything in lithium at this point in time, but it's not going to have an impact on our operation competitor to what the iron ore customers are doing. So that's kind of the way we characterize it, but we are confident long-term that, that demand profile from lithium will play. I think the other point to make around our mining customers in WI and New South Wales, but they're the most innovative, most efficient operators in the world. They come up with ways to integrate technology to drive the cost of production down, to record levels. So we think the same will happen across the TMWA and it will be a really strong industry, but it's going through that emergency into that maturity, and the good operators are going to make strong returns in the sector.

Great. That's really clear, Ryan. Thank you. Secondly, you're continuing to deleverage cash flows higher, earnings are on the up. How are you thinking about dividend payments or payouts and ongoing debt repayments going forward? Do you have a net leverage target in mind in the short term or in the medium term?

Look, I think we, the Board consistently look at dividends. I think the focus for the last sort of 18 months has been on deleverage. We took on substantial leverage. I mean when Ryan -- at the peak, we were at 3.8x when we took over Boral being down to 1.9x. I think is, from our perspective, a testament to the quality of the businesses and the free cash flow generation of the businesses. For us, I think it gives us options, which is always valuable for a group like ours. In terms of the dividend, I think we have a store of franking credits, which gives the Board flexibility. But now that we've -- I think we've met our targets. We now have various options of capital management. So repayment of debt, we have $3.7 billion of net debt. So we can still reduce leverage effectively. And in that context, we then have other options. But if we have a look at the TSR performance of the group versus our dividend yield, it's very clear over being top decile TSR performance 1, 3, 7, and 10 years, that the group is better and ultimately, redeploying that capital and generating a return for shareholders than merely distributing it back as a dividend, but we will certainly consider that, and the Board will take that under consideration for August.

Thank you. Your next question comes from Julian Mulcahy from E&P.

Ryan, just a couple of sort of big-picture questions from my point of view. I'm just interested in your thoughts on turning over the asset portfolio because if you look at the main businesses, Boral's had -- there's probably some more earnings upside, but it's probably at its best gains. Coates is at the toll of its game, but workloads started to play out maybe capacity constraints, and Beach is going to have a big 18 months ahead with by what's here coming on. So what's your sort of view on the timing? Or do you rather keep these businesses and ride the whole cycle now?

So I think the way -- how we think about -- answering the latter question first. I mean, as an operating business like ours, we have to be thinking the portfolio is an active decision to buy, sell, hold. So the fact that we look through our businesses, we want to make sure that they've got the potential to drive growth and except return on capital, and that we can drive performance in that business better than what on its own. And that outlook is positive to warrant retaining the position, if you like, and how we think about capital allocation. So it is an active decision in that context. So it isn't just a notional accumulate and hold. So we'll think through that. We still feel that the 3 core sectors we're exposed to have some sectoral tailwinds, which really how we've reorientated the group over time. Mining production is still a strong factor. The infrastructure and construction, yes, there might be some elements around reaching a bit of a plateau. But fundamentally, there is a lot of work that is committed to happen over the next 7 years, and we still think it will make up a key part of the economy. And playing into it with Coates and Boral's probably unique and some of the better opportunities to play into that. We don't have any contract exposure, and we can play into that investment theme as well as how we think the transition on or the increase in use of rental services will play in over a long-term format. So we still think that there's an interesting opportunity there. But we have to assess the opportunity and growth profile, and how best to position that from a group perspective. And if external party or a value of the business higher than we do, well above what we think that's worth, and obviously, we'll look through that. And we have to actively think through that position. With Boral, we still think we're only halfway through the performance journey. I concur with Vic's comment about that. There's still more to be done. First agent prices is done. The next stage is more complex to look at the operational improvements and driving some of the efficiencies in there and getting the core business performing well to deliver the EBIT margin over a sustained period of time, but that's still an opportunity, but we actually think through that from a portfolio perspective. Transitional gas is something which will play through for a while. So we think Beach's positioned there, hopefully. And we're confident that new leadership under Brett will bring a strong operating discipline, the right focus on execution, and that will drive value and hopefully, will help Beach to grow organically and potentially inorganically. But we will have to think through our position in that. But ultimately, we're supportive of that over the medium term. And we see opportunities. So I mean, we actively think through portfolio construct, and it's element as a leadership team. At SGH, we're thinking through how to drive that from a value perspective, but we do think there are growth opportunities across our businesses facing into those 3 sectoral themes.

That's very clear. And just a second question on the balance sheet. I mean, you're gearing down to 1.9 now at the Investor Day last year, I think you were saying 2.5 is optimal, anything below that's inefficient. And the fact that you've kept the dividend flat to sort of further deleverage. So can we read into that, that you're looking to roll into another big investment?

Look, I think we're probably -- yes. The cash flow for us, we probably look through in two contexts. One is very strong cash flow, 2, Coates, and Boral, I think it's probably another key emphasis to just make on Coates because often it's not -- those businesses are not seen as attractive cash flow businesses, but this is. But as we've made a big investment in cash into WesTrac. And I think like as far as the demand from a working cap perspective on inventory. So I don't think we've seen the full potential of that cash flow in a normalized half. We're trying to build some optionality, I think, in that context. And I think we see it quite prudent in this environment to keep that balance sheet flexibility. That's the way we characterize it. But as I mentioned before, our focus is on the portfolio as it is. It's not looking to anything else at this point in time. I think next 6 months, we certainly want to just drive the continued execution across our business and our portfolio.

Thank you. Your next question comes from Nathan Reilly from UBS.

Just a couple of questions really on WesTrac. Firstly, Ryan, maybe you want to just speak to some of the underlying sort of lead time trends, ex-factory for Caterpillar at the moment? I'm just curious around your decision to sort of invest in a higher level of inventory at this point. Just wondering whether that reflects some of that constrained parts availability that you flagged earlier, but also just in the context of the demand you're seeing for parts volumes at the moment?

Yes. So the right way to view it, the buildup in -- or invested inventory relates to committed orders. And that time frame, I'd say it hasn't changed, but just still remains a little extended longer than will be normal, but it hasn't kicked out further. It's been pretty consistent. The part supply that there's just, I think, a massive growth in the global demand, for example, large engine rebuilds, and that's a key part of our work, if you think through what's required in servicing the large mining trucks. There are key components in there. We did make a decision to build that parts inventory up. But that part supply has constrained parts as CATs dealing to that global growth in demand. It's something we're working through. So in that context, holding higher inventory makes sense from an ability to support that customer demand and deal to that part constraint aspect, customer demand is there, and that we see playing through over that medium term. So that's a positive factor. But overall, we're seeing the constrained parts, constrained labor is probably the 2 core constraints -- less labor is less of a factor given the investment we've made. But that's probably a key factor to meet that potential customer demand.

Thank you. And in relation to pricing, what we were able to achieve in terms of price updates in January? And what's your expectation going forward?

Look, low single digits. So there's not a lot of pricing movement over this period. Going forward, that's going to be contingent on CAT view, and that will be in FY '25. But so it's less pronounced of a factor into FY '24. And I think the bigger factor has just been the growth in volume.

Understood. And finally, can you maybe just give us an update just in terms of how you've seen, I guess, your visibility over rebuild demand evolve over the last, I guess, 1.5 years, but just maybe give us a comparison in terms of how that sort of demand sort of would stack up on a historical view and what you're sort of seeing, just in terms of how those demand drivers are changing, just given some of the points you raised earlier about energy transition and also fleet life extension activities?

Yes, it's most intensive period of rebuild we've ever experienced in that context. I mean, I think that's just coming to the -- we've got the largest embedded fleet, if you like, a customer fleet that we've had and a longer age profile. So all of the reins pretty intensive R&M. I mean, I just want to emphasize the strategy of our customer is entirely logical because they are far more sophisticated at managing that fleet to minimize production downtime and get that utilization out of that aged fleet, and it is a highly productive strategy. It requires a very focused and integrated alignment with what we can provide as far as component exchange or part exchange from componentry to full equipment rebuild. But I'd say volume is substantial. And we're having to kind of manage the part constraint to customer demand profile very closely, working closely with customers to do that. But demand is at levels we haven't encountered before, and that's going to be sustained for a period of time as we enter a pretty intensive rebuild phase from an activity context. This is a multiyear type demand.

And how are you thinking about adding capacity to rebuild values in your facilities?

We've made some investments over the last few years. So that's all coming to fruition as far as having that capacity within both Gilford and within Tomago. So the capacity we've invested is enhancing our throughput. So that's working, I'd say. There's always more we can do and we're dealing with existing incumbent sites to our kind of working through trying to optimize that. The facility for us is probably less of a constraint. We've managed to get incremental capacity. That labor investment is working, but that's still a constraint, and we have more people would be able to put more work. But fundamentally, we're trying to solve that and then the parts aspect. So for us, it's more of that labor and parts. But the path is a little bit out of our -- we can control elements of it, but not completely. So that's what we're working very closely with the CAT to make sure we're prioritizing customers and getting a longer view into demand profile to match that supply aspect as best we can. I think that's been one of the ways we've been able to unlock growth into the first half of the way the team has been very effective now to do that.

Thank you. Your next question comes from Nicholas Rawlinson from Jefferies. Please go ahead.

Hi, Ryan and Richard. Thanks for taking my questions. And congrats on a very strong result. Just on WesTrac, does the huge increase in machine sales and parts as well as the committed orders that you were just discussing reflect sort of a pull forward in the new development projects for the big iron ore players? It sounds like there's a lot in the pipeline there, but timing has been a bit uncertain.

I think it's more an expression of activity across the board from a number of different projects. I wouldn't say it's one, in particular, it's just a multitude of activity. And I'd also say it's across WA and New South Wales. I mean, it was break it out, but New South Wales had a record result for the half, and activity levels in new machine deliveries and product support. But overall, there's a strong level of activity across the board. I wouldn't say there's any pull forward. I think it's just pretty consistent. If anything, it's probably be a catch-up from demand in prior periods, and that's still got that notional demand catch-up that's going to occur with the supply aspects around parts of labor. But fundamentally, it's just a strong period of activity.

Great. Thanks, Ryan. And just on Coates with margins nearing 30%. Is there still capacity to expand margins, or is it really just going to be revenue, which drives the growth from now?

We still believe there's an opportunity to a margin. Again, we look to international peers, and there's certainly room on the upside on a margin basis, on EBITDA, particularly, and EBIT. But for us, we're keen to utilize and grow that top line which should translate through operating leverage.

Right. Thanks. And just following on from that question you had before in relation to lithium and nickel, do you have any idea of what sort of proportion of your fleet parts would be comprised of lithium and nickel projects? Or is it just in material?

We would put it into other minerals in terms of our splits, and you're talking less than 10%.

Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.