SGH Limited (SGH) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Seven Group Holdings FY '24 Year-End Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Ryan Stokes, CEO and Managing Director.

Thank you. Good morning, and welcome to the Seven Group Holdings full year results presentation for the year-ended 30th June 2024. I'm Ryan Stokes, Managing Director and CEO. Joining me today is Richard Richards, the Group CFO. SGH is one of Australia's leading diversified operating groups with a market capitalization of over $15 billion, and inclusion in both the ASX 100 and MSCI Global Indices. We own and operate some of Australia's leading industrial services businesses and have exposure to transitional energy through the supply of natural gas and LNG. We focus the deployment of capital and investment in the Australian market and within 3 strategic growth thematics, mining production, infrastructure and construction and transitional energy. Within these thematics, our businesses have scale, leadership position and privileged assets to provide a competitive advantage and economic mode. Our approach to capital allocation is complemented by a disciplined operating model, emphasizing execution with accountability. Our owners' mindset approach guides our business decisions and performance of our leaders and people. It brings a strong belief in the power of continuous improvement and long-term value creation. Above all, we are committed to serving our customers. We deliver best-in-class products and services with our customers at the heart of everything we do. The execution of the strategy has underpinned the delivery of strong and stable cash flows, top decile shareholder returns and an 18% EBIT compound growth rate for over a decade. Strong customer activity in FY '24 supported SGH to deliver revenue growth of 10% to $10.6 billion. The revenue growth was supported through increasing operating leverage, resulting in EBITDA of $1.9 billion and EBIT of $1.4 billion, up 14% and 20%, respectively. Group NPAT of $850 million was up 30%. Operating cash flow of $808 million was down 32% as a result of a more than $500 million working capital investments at WesTrac. The investment was predominantly in part on machines required to meet the strong customer demand and support growth into FY '25. Significant earnings growth at WesTrac and Boral were the core drivers of the FY '24 result, delivering 25% and 61% EBIT growth, respectively. Coates also delivered robust EBIT growth of 9%. In aggregate, these businesses delivered EBIT of $1.3 billion, up 28% and represent over 90% of SGH earnings. The equity accounting contribution to EBIT of our energy and media businesses fell by 13% and 58%, respectively. Key outcomes over the past year include the completion of our compulsory acquisition of Boral on July 4, with post-acquisition leverage peaking at 2.26x. A focus on operating leverage supported an expansion group EBIT margin to 13.4%, up 106 basis points, return on equity of 20.8%, up 406 basis points and delivering total shareholder returns of 56%. Key financial results for the year included 10% growth in revenue to $10.6 billion, 14% growth in EBITDA to $1.9 billion and 20% growth in EBIT to $1.4 billion, a 30% growth in NPAT to $850 million. Statutory NPAT of $164 million was down 23%, primarily due to SGH's share development and exploration asset impairments at Beach Energy and a mark-to-market impairment of Seven West Media. Net debt-to-EBITDA finished the year at 2.2x and up 2.3x at the completion of the Boral transaction in July. The final ordinary dividend of $0.30 per share declared in July brings total dividends for the year to $0.53 per share fully franked. The strong FY '24 results and our long-term outperformance is supported by our purpose, objectives and values and the disciplined application of our operating model. Our purpose is to recognize and serve exceptional businesses, while meeting our objective to maximize return to stakeholders through long-term sustainable value creation. We support this objective with our four values: respect, owner's mindset, courage and agility. The owner's mindset is seminal for SGH and imparts sizes accountability and execution. The operating model has four core characteristics. First, each of our businesses has a dedicated Board structure, ensuring accountability for delivering results. Second, decision-making is pushed toward the front line where ever possible, fostering a lean empowered workforce with accountability at all levels. Third, we focus on execution and growth, integrating the owner's mindset into our operating cadence. fourth, our lean operating structure and focus on accountability make SGH inherently scalable. The 20% EBIT growth in FY '24 and 18% EBIT CAGR over a decade highlight SGH's long-term superior out-performance. This performance has been supported by our operating model and underpinned by a disciplined investment into the strategic growth sectors of mining production, infrastructure and construction and transitional energy. In mining production, Australian commodity export volumes were up 4% for the year, with strong expectations for iron ore and thermal coal exports through this decade. In infrastructure and construction, the project pipeline is robust and replenishing with $1.7 trillion in investment expected over the next 7 years. The sector is also supported by macro and policy thematics, such as the 240,000 new dwellings required annually to meet government policy ambitions. In transitional energy, gas will play an increasingly critical role in supporting the grid. The greater the reliance on variable renewable energy, the greater requirement for firming energy and gas is best positioned to provide this firming solution. Strong demand and tightening supply are expected into the domestic gas market from FY '26 onwards. The global LNG market also finally balanced with supplier risk skewed to the downside. In addition to the strong financial results, we made significant progress across safety and sustainability in FY '24. With circa 14,000 employees across SGH companies and interest, the safety of our people is one of our most important priorities. We are focused on delivering differentiated customer experience and safety is an important component of the value we provide. Our LTIFR of 1.4 and TRIFR of 4.5, both improved by 26% over the year, driven by visible leadership, a culture of collective accountability and rigorous workers and safety compliance and risk management. In relation to sustainability, we recognize the meaningful impact and long-term value our businesses can contribute with core components of our industrial services portfolio inherently circular. This includes machine rebuilds at WesTrac, recycling of Boral and equipment higher codes. We are excited to bring the CAT first battery electric mining truck into our territories this year, where we'll participate in infill trials with BHP and Rio in the Pilbara. We also continue to increase alternative fuel use of Boral, with the completion of the Berrima Chlorine Bypass project, which facilitated an increase in the facilities alternative fuel usage to 28%. Our solar program and associated EV pilots are ongoing at Coates with 26 branches now equipped with solar. WesTrac delivered strong sales growth in FY '24, with capital sales up 12%, driven by customer demand from expansion activities and fleet replacements. Services sales grew by 23%, supported by a 5% increase in parts line item volumes and 11% increase in parts exchange components and overall favorable shift in product mix. Combined, this led to 19% higher sales revenue for the year, significantly ahead of the 10-year revenue CAGR of 12%. The strength in both capital sales and services is expected to continue into FY '25. A positive capital sales outlook is underpinned by the committed resource project pipeline and strong demand from fleet rebuilds and replacement, which we see as mid-cycle. Growth expectations for services are supported by the mining production outlook and increasing installed-base of machines and aging fleets. Customers are increasingly making use of more sophisticated maintenance regimes to extend fleet lives. WesTrac's revenue of $5.8 billion was up 19% for the year, combined with EBIT margin expansion of 10.7%. The business delivered 25% higher EBIT of $623 million. Strong customer activity and demand led to more than $500 million investment in working capital in FY '24. This impacts operating cash flow of $164 million, down $515 million for the year. This investment was in parts and machines and highlights the growing customer demand for services and equipment. It reflects one of the strongest capital sales pipelines for the business in over a decade. WesTrac is investing in its people, productivity and capacity to support customers and growth. The workforce expanded by 4% in FY '24, supported by training investment and recruitment initiatives. WesTrac is also leveraging advanced analytics solutions to drive productivity, while investing in facility expansions and upgrades to support increased customer activity. These investments in working capital, people, technology and capacity provide WesTrac with a strong foundation to serve growing customer demand and deliver growth in FY '25 and beyond. Boral sales volumes were resilient in FY '24, with strong customer activity in the infrastructure and construction sector. Project delays, coupled with a temporary moderation in residential activity saw total sales volume contract slightly year-on-year but remains strong and improved go-to-market strategy, enable pricing traction across all products, offsetting volume pressures and inflationary impacts on costs. Boral made significant progress on its "Good to Great" performance journey in FY '24, delivering improvements in procurement, drag site reduction, recycling and cost base rationalization. In FY '25, the business will focus on disciplined execution, cost control, price leadership and operational efficiency and go-to-market agility to maintain positive momentum on the performance journey. Boral delivered strong FY '24 financial results, with revenue increasing by 3% to $3.6 billion and EBITDA growth of 32% to $599 million. EBIT margin expanded to 10.5%, leading to a 61% increase in EBIT to $372 million. Boral is now achieving our double-digit EBIT margin objective, and we believe there is more that can be delivered. EBITDA cash conversion of 104% was up 15%. Boral will continue investing to strengthen its core operations in FY '25, with a focus on extending quarry lives and enhancing the heavy mobile equipment fleet to improve operational efficiency. We're also pursuing adjacent growth opportunities in recycling and surplus property, including a partnership with Logos to co-develop the Deer Park property in Victoria. Customer activity remained robust at Coates in FY '24, particularly in the West and North regions. An industry-wide skilled labor shortage of up to 240,000 FTE continues to impact project delivery, causing commencement delays. This is expected to defer, not reduce, the opportunity. Coates' focus on driving operational leverage and efficiency was critical to delivering earnings growth. In FY '24, operational efficiency gains were largely driven by the continued rollout of the hub-and-spoke branch model, technology-driven transport, customer service improvements, targeted non-operational head count reductions, and cost initiatives. These efficiency and productivity gains position Coates to better serve customers and capitalize on what are expected to be positive market dynamics into FY '25. Coates' total revenue of $1.1 billion was relatively flat in FY '24. Higher revenue was up 1.5%, with strong customer activity in WA and Queensland, highlighting the advantage of Coates' nationwide footprint and diversified end markets. Operational efficiency gains and focus on cost control delivered EBITDA margin expansion to 46.2%, and EBIT margin expansion to 28.6%. This represents the eighth consecutive year of margin expansion at Coates, and resulted in a 9% increase in EBIT to $327 million. Time utilization remains within the best-in-practice target range at 60% for the year, down 2% on growth in the hire fleet. Operating cash flow of $505 million was up 6%, with EBITDA cash conversion of 96% consistent with FY '23. We continue to invest to support customers and our growth ambitions in FY '24. This included expanding the hire fleet by $83 million to $1.9 billion on an original cost basis. The fleet growth was supported by M&A, including the $40 million acquisition of GTH in New South Wales. Beach Energy showed signs of earnings and operational momentum in Q4 FY '24, with quarter-on-quarter production and revenue increasing by 6% and 10%, respectively. We welcome Brett Woods as Beach's new MD and CEO, and will continue to support him through SGH's chair and board representation to deliver an ongoing strategic refresh with key targets including a 30% reduction in head count, with 26% delivered to date, and 30% improvement in infield operating expenses to below $11 per barrel of oil equivalent by FY '26. In FY '25, Beach will focus on project delivery, maintaining cost discipline and executing its refresh strategy to deliver shareholder value. At SGH Energy, construction of the Crux LNG backfill project is ongoing, with the first cargo of LNG expected in FY '27. SGH's share of Crux development capital in FY '24 was $147 million. Resource volumes at the Longtom gas field were independently verified in FY '24, and an MOU has been signed with Cooper Energy to explore infrastructure access for long-term production. Seven West delivered FY '24 revenue of $1.4 billion, and EBITDA of $187 million, down 5% and 33%, respectively. The result was impacted by weakness in the television advertising market and cost growth. Seven is completing an organizational restructure towards the end of FY '25, including the implementation of a cost-out program and a redefined operating model to drive improved performance across the business. The restructure comes with a refined purpose to build a better digital media business that delivers sustainable and growing earnings and cash flow. SGH's other media interest recorded an EBIT loss of $6.5 million, largely reflecting a $7.8 million loss on CMC. Our investment in CMC has delivered an IRR of over 20% through the life of the investment. I'll now hand you over to Richard to take through SGH's FY '24 financials.

Thank you, Ryan, and good morning. SGH delivered on upgraded guidance with underlying EBIT up 20%. Revenue rose 10% to $10.6 billion driven by strong customer activity in industrial services, particularly WesTrac with modest growth in Boral and Coates. Expenses, excluding depreciation and amortization, increased 8.5% to $8.9 billion, predominantly due to the 20% increase in COGS at WesTrac required to deliver their 19% sales growth. Cost management across SGH enabled margin expansion, EBITDA increased to 14% to $1.9 billion, while D&A rose just 2% to $511 million, highlighting disciplined capital re-investment. This still bit amplified EBIT up 20% to $1.4 billion. Net finance expense of $294 million was 4% higher, reflecting higher debt associated with the Boral acquisition, partially offset by higher interest on cash deposits. Underlying NPAT rose 30% to $914 million, while statutory NPAT decreased to $522 million with the difference largely referable to significant item losses from our equity accounted investments. SGH's statutory results include $360 million in pre-tax significant items. This comprises $245 million being our share of Beach impairment of E&P assets and $134 million due to the impairment of SWM. Other pre-tax significant items provided a net benefit of $20 million, including gains from the sale of Sykes and Coates Indonesia of $76 million, partially offset by Coates redundancy costs of $7 million, Boral direct transaction costs of $14 million and SGH's realized property gains of $5 million. After accounting for $9 million in significant items related to net finance expense and a tax expense of $32 million on these items, the total significant item expense was $392 million after tax. This slide presents an earnings bridge detailing underlying EBIT for each business unit and reconciliation to statutory EBIT. WesTrac EBIT increased $123 million. Revenue growth was supported by strong customer demand for new machines, parts and components. The 0.5% margin expansion reflects disciplined cost control and operational efficiencies. Boral's EBIT grew by $140 million. This was achieved through a 3% revenue growth driven by an improved go-to-market strategy that embedded price traction and improved cost control delivering 3.8% margin expansion to 10.5%. Adjusted for the sale of Coates Indonesia, Coates delivered 1% revenue growth. Accordingly, the $27 million EBIT growth reflects margin expansion delivering EBIT margin of 28.6%, up 234 basis points on cost management enabled by delivery of its hub-and-spoke branch model. Earnings from our Energy segment declined $15 million largely reflecting SGH's share of Beach's $44 million NPAT decline. Media's contribution to SGH EBIT decreased by $36 million. In aggregate, disciplined execution across our industrial services businesses delivered $233 million increase in underlying EBIT to $1.4 billion or $1.1 billion in statutory EBIT after accounting for the $351 million of significant items. Underlying operating cash flow of $1.3 billion was down $259 million, largely reflecting the $500 million investment in working capital at WesTrac, split evenly into machines, parts and PEX inventory. This investment was necessary to meet growing customer demand and support the operations and growth in FY '25. The increase in working capital was partially offset by strong customer receipts across other industrial services businesses. EBITDA cash conversion at Boral and Coates remained strong at 104% and 96%, respectively, while WesTrac contracted to 28%. Combined, these businesses delivered 68% EBITDA cash conversion, down from 27% from the prior year. Net interest was flat at $255 million, with a $14 million increase in financing costs offset by an $18 million increase in interest on cash deposits at Boral. Net income tax rose by $152 million to $236 million, reflecting SGH's improved earnings and borrows return to a taxpaying position. Net investing cash outflows were $468 million, reflecting higher PP&E expenditures, offset by the sale of the Sykes business for $101 million and Coates Indonesia for $64 million. Net capital increased by $25 million to $488 million, mainly due to higher fleet investments at Coates, partially offset by reduced expenditure at WesTrac following the completion of facility expansions. Payments for production and development assets totaled $147 million, driven by drilling and fabrication activities in the Crux joint venture. Net financing cash outflows were $563 million for the year. This was primarily due to the $607 million paid to acquire non-controlling interest in Boral, $168 million in SGH ordinary dividends paid and $68 million in dividends paid to Boral minority shareholders, partially offset by $440 million in net proceeds from borrowings to support the Boral takeover. Closing net debt increased by $316 million to $4.3 billion, driven by the working capital investment at WesTrac and additional debt associated with Boral transaction, partially offset by strong operating cash flows at Boral and Coates. SGH's net assets decreased by $497 million to $4.1 billion in FY '24, primarily due to the technical liabilities from the Boral transaction, and impaired equity accounted investment values, partially offset by higher net working capital. The increase in trade and other payables largely reflects the $335 million technical liability related to SGH's obligation to compulsively acquire the remaining 5.1% of Boral shares outstanding at 30th June. The $247 million scrip component of this liability was unwound following the completion of the acquisition on the 4th of July. The $405 million decline in investments reflects the mark-to-market of SGH investment in SWM, and million decline in investments reflects the mark-to-market of SGH investment in Swim and our share of Beach's impairments of P&E assets over the year. The higher net working capital was primarily due to a $490 million increase in inventory, predominantly associated with WesTrac, offset by a $94 million increase in payables excluding the Boral transaction liability and $135 million lower receivables. These movements resulted in net debt of $4.6 billion or $4.3 billion excluding leases, representing an 8% increase over the prior year. After adjusting for the $71 million positive mark-to-market on debt-related derivatives, SGH's adjusted net debt-to-EBITDA or leverage excluding leases, contracted 3% to 2.2x. SGH's leverage has subsequently peaked post concluding the Boral transaction to 2.26x in early July, and we expect to reduce this naturally through strong operating cash flows in FY '25. SGH entered into a 12-month $700 million bridge facility to support the Boral acquisition, which was drawn in May and fully repaid in July. In addition to refinancing the $578 million tranche of the SFA in the first half, SGH finalized the $600 million Asian term loan tranche attracting strong credit support from new lenders for SGH Credit and core thematic exposures and was 3x oversubscribed. This 6-year tranche priced inside our existing tranches and funded in July. The ATL proceeds were used to fully repay the bridge. The SFA now provides a limit of $2.5 billion with no significant corporate maturities in FY '28. WesTrac also completed a $410 million USPP in January, which was also over 3x oversubscribed, demonstrating market confidence in our financial position and our capital management strategy. This positions SGH with long-term debt within the operating businesses, matching the long-dated nature of their assets and a revolving corporate syndicated facility to support working capital and other investments. SGH simplified its capital structure over the year, settling the $366 million equity swap, the $250 million exchangeable and the majority of the $46 million convertible. The Boral NCI was also eliminated post acquisition in July. At 30th of June, 48% of SGH debt was fixed at an average rate of 4.8% and an average duration of 6.3 years. Our all-in funding cost stands at 5.7% with a weighted average maturity of 4.1 years, which increases to 4.6 years after drawing the ATL and repaying the bridge. I'll now hand you back to Ryan.

Thank you, Richard. The delivery of the Boral transaction was a key outcome for the year. Boral is a close strategic fit for SGH and is strongly aligned with our capital allocation principles and operating model. Boral faces into the infrastructure and construction pipeline, and is now Australian focus where SGH has a proven ability to drive performance. The business' market leadership and improving cost discipline, which has highlighted, which is in the significant FY '24 earnings growth. It also has a privileged assets that provide a competitive advantage such as its quarry and concrete batch plant network. Boral's rapid performance improvement and moved to a net cash position during the year drove the timing of the transaction. Importantly, only 100% of Boral provides SGH access to strong cash flow generation, which can be deployed to the most accretive opportunities. Looking to FY '25, SGH will drive performance outcomes across our businesses through maintaining strict operating cost discipline and integrating Boral to support its good-to-great performance journey. SGH will also continue to invest to strengthen our core and support growth and capacity while driving operational efficiencies and margins. At WesTrac, that investment will focus on service capacity and working capital as required to support customer activity and growth. Boral will invest in heavy mobile equipment and the quarry network to improve operational efficiencies, strengthen the upstream network and extend asset life. We'll also continue to develop growth adjacencies in recycling and surplus property. Coates will explore additional programmatic M&A to increase market share and grow the higher fleet. The disciplined execution of the operating model, combined with these investments, provide a strong platform for SGH to continue to deliver earnings growth, stable and growing dividends and superior TSR for shareholders in FY '25 and beyond. The positive outlook for our core sector exposures, adjacent growth opportunities and FY '24 investment in working capital supports group earnings guidance of high single-digit EBIT growth expected in FY '25. Strong demand for services, combined with inventory investment and one of the strongest capital sales pipeline in over a decade supports a growth outlook for WesTrac. At Boral and Coates, both businesses are well placed to leverage productivity gains from FY '24 supported by a robust infrastructure and construction pipeline. Beach Energy's refresh strategy and wait to see a contingent production guidance of 17.5 million to 21.5 million MMboe underpinned a positive outlook. We look forward to effectively capturing these opportunities to deliver for our customers and shareholders in FY '25. Thank you for your interest and continued support. We're now taking questions.

[Operator Instructions] Your first question comes from Nathan Reilly with UBS.

Two questions for me. The first one, just in relation to the growth outlook which you provided for both Boral and Coates. Ryan, talking to, I guess, the productivity gains, which you're looking to balance against the underlying demand in activity. Just want to talk us through your assumptions around both those factors, please?

Sure. So both Boral and Coates will continue the work on that operating leverage and efficiency gains. We do expect market conditions to provide really favorable outlook in sectors. I think it's with stepping into the geographic breakdown of that. So there has been strong growth in regions we call out West and North, and I think we're starting to see that activity start to step up in East, South remains a broader question from a Coates perspective. But overall, we do see the breadth of that network providing a basis for opportunity, but our focus is on how we continue to unlock further efficiency through Coates' network and where it makes sense, looking at a certain programmatic M&A, but I just preface the guidance is not conditional on that. It's on the organic steps. In relation to Boral, we see the outlook broadly positive from a dynamic when we couple the focus on pricing discipline and just overall activity. So both factors I think, we see positive market dynamics playing through with a continuation of operating leverage, and that's probably getting more pronounced with Boral because we definitely see that EBIT margin target stepping up from that low teens to higher. So that's definitely going to be an opportunity in FY '25.

My second question, maybe one for Richard. You flagged the strong operating cash flow conversion that you're targeting for '25. Do you have a leverage target that you're expecting to achieve by the end of FY '25?

Look, we'd certainly see it's peaked at 2.26, Nathan. we would see it coming down to something close to 2.1. That's assuming no other major transactions. But the strong operating cash flow that was delivered from the business despite the $537 million of investment in working capital at WesTrac, we would certainly expect to pull some of that WesTrac working cap back this year, and that will support continued deleverage of the group.

Final question, you mentioned just in relation to that WesTrac working capital investment. Can you give us like a sense of what the mix of parts versus machinery used in that half year dollar investment?

Look, it's probably just a rough rule thumb, about one-third of that parts and to the machine, just rough kind of number. If you look at the growth in parts revenue assume where we target from a turn rate perspective, we've definitely seen that overall inventory needs to step up to meet that customer demand. Coupled with what we're seeing as for the demand growth perspective into the year, that's probably a broad mix in that working cap.

The next question comes from Joseph House with Bell Potter Securities.

Firstly, your effective tax rate in FY '24 was 18.8%. Typically, your effective tax rate has hovered around that 20% to 22% mark in the past. Could you explain what drove this lower tax rate? Should we be expecting higher tax rates in the near-term?

It's an interesting one. I think what you'll find is the way that we've segregated the effective tax rate, you've got about $249 million at the group, or effective tax rate for the year. If you then think of the differential is about $32 million on the significant items, which gives you about $211 million referral to underlying. The difference is the proportion of earnings sitting at a group level on an underlying basis for the equity accounted investments, which we recognize on a post-tax basis is actually higher. The other element is we received $200 million of fully franked dividends from Boral during the year. We recognized some tax losses, both revenue and capital during the year, just given the nature of the transactions we completed and, in fact, Boral as well. So that being the case, we would expect the growth in the proportion of earnings referable to our Industrial Services businesses to actually increase year-on-year, which on that sense, we would expect the prevailing corporate tax rate that most corporates would have around 30%. We think we'll probably be doing somewhere in the order of 26%, 27% next year, all other things being equal.

Just Boral, how should we think about margins heading into FY '25? It seems the 10%-plus EBIT margin might be the new norm. What initiatives will be in focus in FY '25 to mitigate cost growth? Is it too early to assume we might see some benefits flowing through from your multiyear CapEx program at your quarries and for your heavy mobile equipment fleet?

Yes, that's a good question across those broad initiatives at Boral. In relation to the EBIT margin result, I mean, it's been a fantastic result and credit to the team. I think Vic and his team have driven a huge amount of change in performance in a short period of time. If you go back to our presentation material probably 3 years ago, we called out that target as an ambition. certainly, it's really pleasing to get the business to that. We do see potential beyond that margin. What gives us confidence is, I think the Australian construction materials sector is a really robust sector and if we look at our global peers and the EBIT margins, they are delivering. It does highlight that heading towards a mid-teen margin is something which is achievable. We're not going to get there quickly. But fundamentally, that starts to become closer to the ambition you like. So, that is definitely going to be a focus for us and we do see more opportunity there. We are completing that performance journey and I think we could be first to admit there's more we need to do. Certainly, that notion of cost control, price leadership, operational efficiency that go-to-market agility, will all be part of that. So, that's going to be a key component. In relation to the question on hyped ME investment and extending quarry life. I'd say the quarry life isn't really going to show an earnings benefit short-term, long-term, yes. In our view, though the company is probably underinvested in that area, we're going to be making investments to that quarry life. That's going to be an underpinning of future growth. The way we think through that is we look at that growth over the long-term. So, we're definitely going to be an important investment. Some of that won't necessarily be pure capital investment, it just be through how we extend through at least government leases approvals, et cetera. But on the HME, we do think that will generate an improvement or reduction in operating costs and R&M et cetera, over time as well as operating efficiency. So, some benefit will play through in that investment in an earning context. So, the performance journey is a very complex series of work on a number of different fronts. We need to execute effectively and there's still that performance uplift we expect. Part of that growth dynamic for FY '25 will be further delivering on that performance journey.

At WesTrac, are you experiencing any supply shortfalls for large diesel engines, just given the growth in data center construction around the world? If you are, is that likely to impact any rebuild opportunities in FY '25 and beyond?

That's a fascinating question because if you're asking that in February, we would highlight that as a fundamental issue we have to manage. I think we probably did highlight the large engine aspect. I'd say for Caterpillar has been a very concerted effort over the last 12 months to address the supply aspect, given there's been a step-up in demand both on the rebuild aspects as well as that new engine demand and you're exactly right, data centers are a massive demand for new engines. They have worked to improve that supply chain. So I'd say as we complete the year, we've seen a big step-up in that supply. Part of that working cap build-up has been a growth in parts inventory and a lot of that is going to play into that large engine attributes. So we've seen that improve. It's still a fact within the management, but less of a factor today. I'd say just given the work that gets on supply chain, we're starting to see it ease, if you like, that pressure point. So overall, we don't envisage that will be a constraint for growth in FY '25.

Your next question comes from Julian Mulcahy with E&P.

Ryan, I'm just interested in how you see the year playing out because you had revenue for both Boral and Coates fell in the second half and consistent with your comments about an air pocket recently in the press. So should we kind of expect that revenue will be down first half to rebound in the second half for both of those businesses?

I think is probably worth putting some context around that notion. The outlook in demand is positive. We see ability to step through that. We don't see a play through in that volume. If there is any air pocket, I don't want to use that term. We've been living through the last 6 months. Reality is what we emphasize, what we see in demand we expect to play through. We'll probably see further growth in calendar 2025, as that step-up in residential dwelling suppliers has set through from an overall supply perspective. But we're expecting demand to remain relatively stable through the year. We're not seeing a massive fluctuation, but we are probably more confident that will start to bolster into half 2 as we see activity stepping up. But that overall it's not a material factor from a half-on-half dynamic. We do see that's being relatively consistent. It probably looking through the results, the elements on a half-on-half basis. I mean WesTrac had a stellar first half, we probably see that probably moderate to some degree as we've seen in the second half. But fundamentally, the overall demand we're anticipating to be broadly consistent through the financial year.

In terms of the movement on costs, because you did very well on cost in both Boral and Coates in the second half to offset that revenue decline. Have you got a lot more room to move on costs, if it is a bit slower initially?

I'd say it's a constant focus. There's a firm belief that we need to continue to look at what we're going to improve our business. What we can do is be more targeted from a region basis. So we are acting on that at the moment, so from a cost perspective that southern market is lower than we expect, we can re-allocate gear and resources to actually move them. So it's one of the strengths of the Coates model is that ability to re-position. So if demand is stronger in Queensland, we can actually re-allocate and re-orientate the business towards that. That's planned through at the moment. So I'd say in short, the answer is yes, there's more we can do. The more we need to do more, the Boral has under its plan to deliver on its potential and more Coates to do in response to where there's opportunities where we need to deploy more gear and where we can pull gear from it and overall labor resources as well. So I think that's a constant focus for us. We do think that there's more that we need to push on to for both businesses.

In your guidance, in the past, you've had a growth rate for the industrial as opposed to the group as well. You haven't done this time. Is it fair to say that WesTrac will be the major driver of the growth this year?

On a dollar basis, maybe, I mean, borrowers going to be pretty strong on a percentage basis as well. But if you look at the group today, 90% of the earnings are entitled towards industrial services. We figured the group guidance was probably sufficient and deals with what may play through more broadly. As we sit here today, we are confident in that outlook and our ability to deliver to what we see as a pretty robust demand dynamic. So overall, I think that both WesTrac and Boral have a pretty strong opportunity set in front of it. Coates is going to have similar growth opportunity, but not quite the same percentage.

[Operator Instructions] Your next question comes from Simon Thackray with Jefferies.

I just want to re-package some of Julian's earlier question on cost, and you got some very helpful answers there. But flipping it on its head, what about portfolio pricing expectations as we move forward for Boral and Coates. I asked that question in the face of expectations for end markets, which you've been pretty clear on. But in particular, given the very high level of inflation in infrastructure cost, that seems to be a recurring discussion topic with Central Bank with central banks and government at the moment. How should we be thinking about price in this inflationary environment for Boral and Coates?

Look, I mean pricing is certainly an important aspect. We're not in the same environment. We're probably 18 months, 2 years ago where there was a strong pricing power and that actual I mean our view is on ensuring that we can cover kind of our own inflation dynamic with pricing and continue to push that in a disciplined way. I think through the broader issues from the industry, which I think is where you guys in Central Bank, frankly, I think there's more in regulatory cost and processes that's driving inflation of more than 24% than what concrete or high gear would be in reality. So I think there's broader issues with that inflation. But from our perspective, we had a reset of the effective price of construction materials and over time, got better return from our higher equipment. We would just need to continue that same discipline. But in our view, the growth and the performance result shouldn't play through as financed through price in FY '25. It's going to be through what we can do to drive more operational efficiencies in both businesses.

Then maybe just touching on your reference earlier to M&A, and it was just a reference. As a national operator, particularly for construction materials, but arguably relatively under representing in WA. Your views on expanding your expense or leverage to WA.

Yes. I think you're probably trying to ask about BGC [ pipeline ]?

I'm not actually, it's more broadly.

When I talk M&A, I think it was more reference to Coates and what we believe in relation to there's opportunities out there to acquire fleet at reasonable values. It's a logical way to grow fleet. I think Coates is operating at a level now where integrating businesses is quite accretive on the right terms, but we'll be very disciplined around that. In relation to looking at Boral's footprint in WA, where we think that's an opportunity. We think there are other opportunities to invest and grow. But overall, we'd like to expand that position in WA. That could be through just organic investment, to be honest, because for us, it's really about the downstream position. If on the right terms and inorganic opportunities to come up, we'd have a look, but we have to have to remain disciplined in that context. But we'll take a similar view in other jurisdictions as well. I think the important and I made a reference to it that now if we look at SGH today, we've got 3 really strong cash flow businesses and Richard's point around the strength of the balance sheet means that we can avoid capital across where we think there's the best return and opportunity. And that's a unique attribute of SGH. So we'll look through that where it makes sense on anything in relation to either organic or any inorganic accept. But I think to-date, we've been very disciplined on inorganic steps, and we'll be retaining that discipline as we go forward.

Just your comments on the leverage in the margin and the low increase in D&A cost of 1.7% year-on-year, reflecting disciplined capital allocation, cost recovery pricing. What's the outlook for D&A? What's the range for D&A in FY '25 under the current capital allocation plan? Can you give us a bit of a skew on that just makes life easier?

So we wouldn't see D&A significantly changing next year. In terms of capital investment, we would see capital investments stepping up a little, and that really just reflects the net incremental investment in the energy assets. I think you could expect the energy assets in terms of cracks to incrementally, we'd be talking about another $100 million of capital in crux based off current views, which given their infield and drilling are pretty well formed and the rest of the businesses. So we would expect all up next CapEx in the year to be a little over $100 million greater than this year. Then with the catch-up capital that Ryan's refer to an HME, we would expect that sort of edging up close to $800 million.

Your next question comes from Joseph Kusia with Goldman Sachs.

Firstly, on the adjacent growth opportunities you've highlighted with Boral. Can you maybe give us a sense of the size of the opportunity and enhancing the C&D waste position? And what kind of investments would need to be made there? Secondly, can you just elaborate a bit on the property strategy, particularly the partnership with Logos on developing Deer Park?

Yes. So I think the primary reason that we called that out was just to ensure we're emphasizing where we see Boral and our focus has been on getting the performance journey in place and locked in. And as I said, the team has done that and is a great result in our core construction materials business to see the EBIT margin where it is. We do see those adjacent growth areas, and we definitely think recycling and leveraging the Boral asset position we have inherently in using some of those recycled products as an opportunity and is one we want to explore. I'd say at this point, it's probably too early to outline what we see in that context. But what we're just trying to emphasize that there's growth expectation in the core construction materials that there are additional growth avenues within Boral. It's a bit similar with property where the Deer Park site has been one we've spoken about over time. It's been quite heavily portrayed through the independent expert report as far as the opportunity. We are really trying to emphasize our pivot to taking and petrol Boral from a prior strategy to divest its surplus property to where we can look to hold, redevelop and kind of exploit over the long-term. So both are elements we call out. But recycling has had good growth in FY '24. We expect growth in FY '25. But at this point, we wouldn't really have any more kind of detail on any kind of inorganic steps other than to say, we do think it's compelling growth and an area we just we'll focus more attention on into FY '25.

Perhaps on Coates, are you seeing any sort of broader industry dynamics that are supportive of higher as opposed to sort of construction companies owning their own equipment? I know you've kind of spoken about that a little bit in the past, but kind of came to hear, if there are any updates on that? How are you sort of seeing the competition in the higher market evolving at the moment?

Yes. We've spoken about that because we think that's a long duration trend where customers are increasingly looking to rental to solve their equipment requirements, if you think the nature of projects and what's required to win major government projects today, it isn't the requirement to have a large pool of gear. There is an expectation as the head contractor you can subcontract and bring gearing where required and rely on a rental market for that. And that we've seen in other jurisdictions. I think that's playing through in Australia as well. So we do see that growth dynamic over time playing through as far as the demand for a higher or the increasing higher the percentage of work done, so I think that's a structural dynamic that is playing through. In relation to competition, I mean, where markets start to flat to negative, you definitely see an increase in competition. We've been focused on maintaining that price leadership as the market leader, and that's been an important discipline for us. I think that the value Coates has is an ability to move gear around, which means that we can bring gear into markets where there's stronger demand and pull out of markets where it's weaker. That's definitely playing out on the East Coast with what might be elements in Victoria where we're seeing growth. In Queensland we're seeing a lot of commencements occurring in New South Wales, so that's a key strength of Coates platform which means it gives us a better position to compete. Overall, we're seeing the market probably still pretty consistent and I'd say there's probably a growing dynamic where over time there'll be increasing concentration to fewer bigger players which in our view will aid improved returns.

How's the Coates Solution business performing?

Yes. We've had a much greater transparency into the P&L in that business and I'd say on engineering solutions it's performed very well, we're winning work in that context and making superior margins. On industrial solutions we've got some work to do on our go-to-market strategy and that transparency in the P&L has given us better insight into that and so the lumpy nature of some of that work, so industrial shuts et cetera mean that we are reviewing and adjusting the workforce to be more variable to deal with some of that work as an example. But overall, it's a key growth factor for us and it does present a meaningful contributor to earnings, but we are continuing to push that go-to-market enhancement and improvement. So it'll be a big focus for us in FY '25 as well.

On a WesTrac, can you maybe talk about the ageing of the fleet and kind of what the average lives are of the current fleet? How that's changing and perhaps any additional color on how that's impacting the sort of parts business?

Yes. I'll give you some broad context, but Richard gives the data point on the number. But I think if we look at how customers are operating gear today, the notion of running components to their appropriate life is something that is happening more and more which means you can kind of extend that frame life out and look to continue even through rebuild of that frame to have that frame extend longer and longer. And having gear in territory working and looking to rebuild seems to be a bigger focus for customers. So we are seeing that strategy play through. We are seeing a pretty active kind of rebuild attribute, but it's a logical maintenance strategy when you can have aged gear work at the same productivity as new gear through that component management and our job in being able to rebuild individual components means that we've become very integrated into that whole maintenance operation. Richard?

Sure. It's really relevant when we talk to mining fleet. We've got roughly 8,000 mining units currently in operation in territory. If we have a look between the 2 states, in terms of WA, despite the significant investment in new fleet, the average age of fleet has actually increased by effectively 0.2% of the year. So it's gone up from 11% to 11.2%. In terms of New South Wales, it's actually gone up filing by 0.2% again from 13% to 13.2% just reflecting. I suppose the different investment histories between New South Wales and WA, so New South Wales has a slightly older fleet. In terms of where does that sit against historical averages, that's probably in terms of New South Wales a little higher than historical. In WA, it's probably come down just a tad with the significant investment at Boddington, KCGM and some of our other customers over the last 2 years.

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