SGH Limited (SGH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SGH Limited First Half FY '26 Financial Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Ryan Stokes. CEO and MD. Please go ahead.

Thank you. Good morning, and welcome to the SGH results presentation for the half year ended 31 December 2025. I'm Ryan Stokes, Managing Director and CEO of SGH. Joining me is our CFO, Richard Richards. Slide 2. SGH is a leading Australian diversified operating business, focused on industrial services and energy. Our strategy is centered on owning and operating market-leading businesses with scale, privileged assets and defendable competitive positions. We are deliberately Australian focused with exposure to long-duration demand thematics -- our approach is driven by the SGH Way, which brings together disciplined execution, capital allocation and an owner's mindset with a clear focus on delivering long-term value creation and TSR outperformance. This execution and accountability led model underpins how we operate WesTrac, Boral and Coates and guide our disciplined approach to capital allocation to drive growth. SGH delivered a strong first half result highlighted by earnings growth, margin expansion and improved cash generation. EBITDA of $1.1 billion increased 1% while EBIT was up at $844 million and NPAT increased 2% to $518 million. Operating cash flow increased 32% to $1.1 billion, reflecting strong cash conversion across the business. Slide 4. Revenue of $5.4 billion was broadly flat, reflecting the expected normalization of elevated WestTrac capital sales in the prior period. EBIT margin expanded to 15.6%, driven by ongoing profitability improvements at Boral and WesTrac supported by disciplined cost control. Industrial Services EBIT increased 1% to $774 million, led by delivery of mid-teen EBIT margins at Boral and improved profitability at WesTrac. Operating cash flow increased 32% to $1.1 billion with EBITDA cash conversion of 98%. The strong cash flow nature of the businesses supported a 4% reduction in leverage to 1.91x. This level is below our target range, providing increased balance sheet flexibility. The strong result also support payment of a $0.32 per share interim fully franked dividend, up 7% and in line with our ambition to deliver stable and growing dividends over time. Slide 5. Safety is an absolute priority for SGH. In the 12 months to December '25, SGH delivered meaningful operational safety improvements with LTIFR reducing 36% to 0.7% and TRIFR reducing 31% to 2.7. These improvements were delivered across all business units, reflecting continuous improvement plans, our focus on critical risk management and updated consequence management frameworks across SGH. On sustainability, WesTrac and Coates continue to play key roles in the circular economy through the remanufacture and rebuild of machines and components and the provision of rental equipment. Boral also processed over 1.25 million tonnes of recycled product over the half, supporting both sustainability and financial outcomes. Further progress was also made on our decarbonization journey with the increased use of alternative fuels at the Berrima Cement plant. Slide 6. WesTrac delivered a strong result for the half, supported by services growth and margin expansion and strong cash generation. Revenue of $3 billion contracted 6% following the expected normalization of elevated capital sales in the prior period. EBIT of $348 million was broadly flat with higher services revenue and margin expansion offsetting the movement in capital sales. EBIT margin increased 60 basis points to 11.7%, driven by a higher service mix, disciplined cost management and improved workshop and labor utilization. Operating cash flow of $496 million increased 92% with EBITDA cash conversion of 129%, reflecting improved inventory and working capital management. Slide 7. Services demand remains strong with the elevated reboard activity in the first half expected to strengthen further in the second half. This demand is supported by the size of the installed base and aging fleet profile, driving demand for parts, rebuilds and product support activity. Capital sales demand is also robust, supported by a committed resource industry project pipeline. Construction equipment markets are also showing signs of positive activity. WesTrac is progressing technology and efficiency initiatives, delivering improvements in capacity, lab utilization, parts availability and turnaround times, ensuring WesTrac can continue delivering for our customers. Slide 8. Boral delivered a record first half performance with revenue of $1.9 billion, up 7%, supported by volume growth and improved go-to-market strategy and value-led pricing traction. EBIT increased 10% to $284 million, with EBIT margin expanding to 14.7%. The performance journey initiatives are working to ensure the margin improvements are enduring and structurally embedded into the business. Operating cash flow of $336 million and ROCE increased to 19.1%, up 3.8 percentage points. The financial result was underpinned by operational efficiency gains and cost discipline, with highlights including a 4 percentage point increase in deliveries on time to 87% and a 3 percentage point lift in rate of service to 87%. The business will continue to focus on cost variabilization, asset and network optimization and SG&A efficiencies to maintain operational and cost momentum. Slide 9. Boral delivered growth across its core products with strengthening demand from the multi residential and infrastructure sectors driving volumes 8% higher for concrete 7% higher for cement and 3% higher for quarries. The volume growth was underpinned by particularly strong customer activity in Queensland and Western Australia with stable activity in New South Wales and Victoria. The strengthening demand and enhanced customer value proposition enabled Boral to achieve a 2% higher average selling price across its core products. Boral also continues to progress strategic network investment and growth opportunities, including quarry extensions expanding the concrete network and both organic and inorganic adjacent growth opportunities. Boral succession process is progressing well and is expected to conclude in March this year. Our focus remains on ensuring leadership continuity and that the incoming CEO can support customers deliver Boral strategy through the Boral way and progress the performance journey. Slide 10. Coates delivered a sequential improvement in operational and financial performance compared with the second half of FY '25, indicating a positive trend in infrastructure, customer activity. Revenue of $520 million and EBIT of $142 million contracted 5% and 9%, respectively, on the prior corresponding period, reflecting the residual impact of the activity decline in the second half of FY '25. Cost actions and operational efficiencies partially offset the revenue impact, time utilization of 61% was strong with an improvement of 1.7 percentage points and the R&M to sales ratio also improved to 17%, reflecting the ongoing operating leverage and network benefits from the hub-and-spoke model. Slide 11. A dedicated focus on improving sales execution delivered higher quoting activity and improved win rates during the half with a win rate lifting by 6.2 percentage points to 33.8%. This momentum is expected to build in the second half as demand from previously deferred major infrastructure projects, particularly in transport is expected to continue recovering. Coates is well positioned to capture the $1.6 trillion 5-year infrastructure and construction pipeline supported by operational and cost efficiency initiatives. -- and the ongoing execution of the growth strategy to lift market share. Slide 12. Beach Energy achieved a major growth milestone in the half year 2016, delivering first gas from the Waste Stage 2 project in December. In the Cooper Basin, flood recovery efforts supported a material restoration of production and exploration development activity has recommenced on the Western Flank. Production for the half of 9.5 million and NPAT of $219 million were down 7% and 8%, respectively, predominantly impacted by the Cooper Basin floods. Beach also generated positive free cash flow over the half, supporting the period-end available liquidity of $925 million, demonstrating the strength of the Beach balance sheet. Slide 13. At Cracks, construction of the Shell-operated LNG backfill project continues to advance with substructure installation almost complete, pipelines laid and the topside facilities ready for transit. Share of the project investment for Cracks was $96 million in half year '26, and first gas remains a target for FY '28. At long time, SDH attitude are undertaking a select phase study to assess restart options with a decision to enter FEED expected in FY '26. Slide 14. In property, the competitive tender process for the 500-hectare Raven are logistics precinct is nearing completion. The development partner will be selected based on demonstrated capability, depth of management expertise, and alignment on the value creation opportunity. Following this appointment, we will move quickly to formalize arrangements and actively progress planning and development to begin unlocking value from the site. In media, the merger of Seven West Media and Southern Cross Media Group was completed on 7 January 2026. The transaction creates a leading integrated media platform with expanded reach across television, radio and digital channels. Annual pretax cost synergies of $25 million to $30 million are expected to be delivered within 18 to 24 months with additional revenue upside over time. SGH holds a 20.1% interest in the merged entity Southern Cross Media Group. I'll now hand you to Richard to run through the financials. Richard?

Thank you, Ryan, and good morning. achieved a resilient financial results for the period, with margin and earnings growth. Revenue of $5.4 billion contracted 2% and reflecting an anticipated normalization of exceptionally strong capital sales of WesTrac in the prior comparative period, largely offset by a 7% uplift in revenue at Boral. Expenses of $4.4 billion reduced by 3%, supported by a reduction in WesTrac and Coates and lower employee expenses at WesTrac and Coates. The larger fall in expenses compared to revenue demonstrates SGH's focus on disciplined cost control and delivered a 30 basis point increase in EBIT margin to 15.6%. EBIT of $844 million was ahead of the prior period. while EBITDA of $1.1 billion was up 1% with the margin improvement more than offsetting revenue impact. Net finance costs of $148 million fell 9%, reflecting lower drawn debt enabled by strong cash flow and refinancing locking in lower debt margins. The underlying tax expense of $177 million was up 3% primarily reflecting higher income from controlled entities with a reduction in equity accounted post-tax earnings. Underlying NPAT increased 2% to $518 million, while statutory NPAT lifted 1% to $473 million, largely reflecting the increase in gross earnings and lower financing expenses. Slide 17. SGH's statutory result included $46 million in pretax significant items including a 21 million share of Beach Energy's impairment and $4 million writing to SGH's share of 7 West Media's significant items. In addition, the mark-to-market of our investment in resulted in an impairment of $20 million based on the market share price. Other notable pretax items included a $7 million favorable fair value adjustment on the Boral acquisition, offset by $6 million in transformation costs associated with the restructuring of the Ashfield business and cartage arrangements. Combined, these and other lesser items resulted in a $46 million net reduction to after-tax statutory earnings for the half. Slide 18. This slide presents an EBIT bridge, which details of the absolute movement period-on-period for each component of the SGH result. It also includes a reconciliation on the table to statutory EBIT. WesTrac's EBIT was strong -- with the expected normalization of capital sales, largely offset by volume and mix led improvements in services, resulting in flat EBIT. Boral's EBIT grew $25 million, driven by volume growth across its core products and value-led pricing traction that supported significant margin expansion. Disciplined cost control on higher asset utilization at Coates partially offset the residual impact of the second half FY '25 activity decline, leading to a $14 million contraction in EBIT. Energy EBIT contribution reflects the lower equity accounted earnings from Beach. Increased realized gains from our CMC investments were offset by lower swim earnings driving a flat contribution from the Media segment. In aggregate, these movements delivered a $1 million increase in underlying EBIT to $844 million or $797 million statutory EBIT after accounting for the $46 million of pretax significant items previously outlined. Slide 19. Operating cash flow of $1.1 billion was a highlight of the result lifting $263 million or 32%, driven by a 23 basis point increase in EBITDA cash conversion to 98%. The lift was driven in a large part to the $249 million higher operating cash flows from WesTrac and $20 million higher cash flows from Boral, reflecting our clear focus on working capital optimization. Dividends from equity accounted investees also drove higher operating cash with $27 million increase primarily reflecting the higher dividend from Beach. Income taxes paid for the half were $198 million and were up $45 million largely reflecting the prior period containing a one-off $26 million U.S. tax refund received by Boral, higher taxable income and a slight increase in the effective tax rate to 27.2%. The Net investing cash outflows increased by $134 million to $408 million, largely attributable to $96 million of capital investment in trucks, higher capital expenditure at Boral. The Boral investment includes catch-up capital and HME of $56 million and growth capital on queries of $62 million. Debt financing cash outflows were down $454 million on lower repayment of borrowings, lower net debt and Boral acquisition payment in the prior comparative period, more than offsetting the increase in the SGH dividend payments. The resulting $85 million net increase to cash and cash equivalents, coupled with repayment of borrowings led to $163 million or 4% reduction in closing net debt of $4 billion. Slide 20. SGH's net assets increased by $353 million to $5.2 billion at 31 December driven by investment in oil and gas assets, PP&E, and lower trade and other payables and lower net debt. Producing and development assets increased by $136 million, reflecting SGH continued investment to bring Crux LNG backfill project into development. Property, plant and equipment rose by $86 million, largely reflecting Boral's quarry acquisition and investment in catch-up HME Inventory decreased by $254 million, primarily from targeted working capital issues at WesTrac. Trade and other payables declined $213 million driven by $80 million lower cat and other payables, WesTrac, $85 million lower payables at Boral stemming from fewer working days compared to the prior period and $27 million lower payables at Coates, reflecting lower fleet CapEx. Slide 21. Adjusting for $99 million in favorable mark-to-market our debt-related derivatives, SGH's adjusted net debt-to-EBITDA will leverage improved 4% to 1.91x at 31 December. At the period end, 50% of SGH's drawn debt was fixed with an average rate of 4.9% and an average remaining tenor of 4 years. SGH's effective borrowing cost was 5.4%, with an average maturity of 4.2 years. We continue to see strong lender support to fund growth objectives. During the period, the $600 million in term loan and $578 million corporate facility tranche were refinanced, extending tenor and at lower rates. There are now no corporate bank facility maturities until FY '30. Finally, available liquidity was $2.1 billion at 31 December, including $575 million of uncommitted facilities. The favorable movement in net debt and interest rates reflect our disciplined approach to balance sheet management and positions SGH to continue to pursue both organic and inorganic growth. I hand you back to Ryan.

Thank you, Richard. SGH's priorities for the remainder of FY '26 are clear. We are focused on the disciplined execution of the SGH operating model to drive performance across the business. We are strengthening sales execution to capture customer activity, continue to target improved operational leverage and efficiency across all businesses and to drive the adoption of AI and innovation initiatives for SGH and our business units. We will continue to pursue accretive organic and inorganic growth aligned with SGH's disciplined capital allocation framework, while maintaining a clear focus on long-term TSR outperformance. SGH entered the second half FY '26 with operational momentum and clear strategic priorities. Our first half performance, together with a balanced outlook across our core sector exposure supports the reiteration of our FY '26 guidance for low to mid-single-digit EBIT growth. Thank you. I now open to questions.

[Operator Instructions] Your first question today comes from Ramoun Lazar from Jefferies.

Richard, just a couple of quick ones for me. I guess just with the result, maybe if you could update us on how you're thinking about that first half, second half skew now previously, I think you pointed to a greater second half skew this year versus last year. But just can understand how you're thinking about that now?

So I think Historically, if we look at the last couple of years, it's been sort of $56 million, $44 million. I think in that kind of context, if we have a look at this stage, we expect it will probably actually be relatively consistent this year. And I think it's sort of in the last 3 years, it's sort of moved around by about 1 percentage point -- so we -- whilst I think we probably are seeing it being relatively consistent, Ryan?

Yes.

Okay. Great. And then just another one, if I can sneak 1 in. Just on the M&A I think in the press release about the BlueScope bid. It's been 6 weeks or so since the first approach in subsequent rejection. I guess just anything if you've got to add there on this call? And then perhaps maybe just M&A in a broader context and sort of where you're comfortable taking the balance sheet to -- if a transaction is successful?

Yes, sure. I think probably address those questions a little bit independently. Maybe start with the last aspect first. I mean what was demonstrated in the half was the strong underlying cash generation of our businesses. So it was pleasing to be able to demonstrate that strength of our cash flow generation, the deleveraging of the business and naturally -- we then look to the aspects of growth opportunities. So we do feel very comfortable to take on leverage and manage leverage with the strength of the cash flow of our operating businesses. So that, again, is just reinforced in the half. In relation to the specific question, I mean, ultimately, if the Board, but really the shareholders don't see value in our proposal, then frankly, we'll move on. There's other compelling opportunities for SGH. We've put our investment criteria quite specifically out there and clearly focused still around industrial businesses with Australian-centric positions of our privileged assets and scale, but we also need to see an opportunity for us to generate a return on our capital. But I think we feel the offer at that $29 dividend-adjusted price is falling fair, and we'll probably say that the burden had versus the execution risk is 1 where we think the offer should be seen as compelling. But ultimately, it's a decision for shareholders or it seems to be in shareholders' hands.

Your next question comes from Scott Ryall from Rimor Equity Research.

I just want to ask about Slide 7, please. The right-hand chart and your ongoing disclosure on the fleet age and things like those great. I'm wondering whether you see any change to what the attitude of customers with respect to fleet age? And on a -- I guess, on a 3- to 5-year basis, what do you think are the primary criteria that your customers are thinking about with respect to fleet upgrades and refresh, recognizing that you get revenue from both. So I'm not -- it's more just how you're seeing customer activity at the moment.

I mean it's -- there's a lot in that question. I probably need to preface that we've got some large customers that are put in the mix, but each has their own specific strategies, it's difficult to kind of lump them into a singular perspective there. But what I would say is the if we look at the fundamental driver of activity for us remains that level of production. And if we see across the major bulk commodities, the coal exports in Newcastle have been relatively consistent iron ore exports, similarly, like we still see those fundamental opportunity drivers as a strong medium long-term indicator for WesTrac. Our customers have made no secret about their focus on adjusting cost structures to deal to what they may perceive as a lower commodity price outlook. But nonetheless, the activity for us is always going to be are intimated to that overall equipment usage, which is that production level. So I think that demand profile, we still see as providing us confidence going into the longer-term outlook for WesTrac. As to decisions on fleet, I think that there's a -- we have seen some fleet replacements of retiring old trucks, bringing new trucks, and that was a big part of what played through into the prior year with the completion of some of that large capital sales activity. We've now got some the fleet going through a rebuild process. So it's a little contingent on customers. I think today, they're probably seem less concern around the fundamental fleet age is a key driver of decisions and look at it on a pure economic basis as well as a technology basis. And that's probably, in our view, going to be 1 of the key catalysts is what's the next wave of technology from a truck perspective that's going to orient an opportunity to invest in fleet outside of the expansion projects. So we still see a couple of those on the horizon as well. I hope that gives some context to the fleet question. But I'd say that the real -- the real key driver for activity for us will always remain that production volume, and we still feel very confident about that outlook.

Your next question comes from Peter Steyn from Macquarie.

Apologies, I'm going to drive that question from Scott, just a little bit deeper into the economics of the business, Ryan, in the context of capital sales peeling off in this half presumably the trends remain relatively weak in the short run at the very least and perhaps into FY '27. But could you give us a bit of a sense of just within the business, the economic outcomes of relative sales performance in different revenue streams? And then what you did in an operating context to be able to achieve the margin expansion you did and still hold bottom line performance? And how much more of that you have if capital sales continue to peel away.

Yes. It's always a complex aspect to try and unpick given the nature of there is a degree of operating leverage that comes through capital sales. But we've always said the aspiration for a high-performing dealer is probably in that 10% to 12% EBIT margin range. And for us, that still remains our objective to be towards the upper end of that, not lower, but mix will play a big part of that. So we have seen a step-up in that rebuild demand and activity. We had anticipated that -- and we actually spoke to that normalization of the capital sales coming off was a peaky period and a step-up in some of that rebuild activity. playing through into this financial year. And we see that continuing to play out over the remainder of the year and beyond. So I'd say that, that margin range is still right from an expectation perspective, but we definitely have a degree of operating leverage with what we have playing through with that rebought activity and managing workshop capacity to keep that as busy as possible through in both WA and seeing some of that step up in New South Wales off what was a slower period from deferments in the first half. So feel that we should be able to kind of navigate that transition from capital sales to a more intensive kind of service support side.

And if I may sneak in just a very quick follow-up. Could you give us a sense of what's happened to parts pricing in the second half because you were anticipating that to fall.

Yes. It has fall through as anticipated. So that's as planned through a little bit, but it's not as material for us in quantum. So we don't have a tailwind there. It's a is a slight headwind but not a material move in the half.

That's the second half?

That's for second half, correct? That is January to June.

Your next question comes from Shaurya Visen from Bank of America.

Two questions, 1 for Ryan and 1 for Richard. Ryan, when we look at your land bank, right, especially at bottom, how do you think about it over the long term. So do you still prefer to be the landlord? Or would you consider being a part owner of any of such future projects? And then I'm thinking more on especially some of the new infrastructure, which is very, very topical. Maybe you want to go on that and then I'll have 1 for Richard.

Yes. Yes. So thinking through that, from our perspective, if it's an operational asset and a core part of our operating network, we definitely want to own that. We've found the lease structure isn't preferable. So where possible, we actually have gone through to pivot from lease to acquire certain locations to acquire or concrete network because there is a preference to have freehold ownership of that site where possible, that we think is, given the long-dated nature of the opportunity we have to operate there and the preference to have that ownership. That's probably the way we think through the land position within Boral. When it comes to surplus property, I think that might be the core to your question. We take a highest and best use viewpoint with an emphasis on how can we create value in a long-dated fashion. So in an accounting context, if we dispose of the asset, it will sit below the line for us. So for us, if we can retain an ownership and partner and codevelop and have rental income stream, that is an ideal outcome, but not all land is situated for that type of application. So it really does depend on the situation. In relation to our biggest opportunity as we spoke to in relation to Ravenhall or Deer Park. That would be 1 where we are looking to codevelop. And so we would end up with a, let's say, not 50-50 partnership type dynamic, but have a rental income flowing through that, and we feel very comfortable with that because we'll be able to leverage our partners' capability as well as it ensures that we can do it in the most efficient capital manner as well. So that's probably the way we think through the land opportunity, but we have to look at what's going to generate the highest and best use from a best return ultimately for us.

Very helpful, Ryan. Richard, just quickly for you, right? Just looking at the balance sheet, obviously in good shape. So if there is no imminent M&A, right, that can be worked out, is there a view to think about shareholder returns via buybacks dividends? Or you prefer to keep the roughie for the future?

I think we've worked very hard. If you think about it, we effectively improve leverage by about $400 million over the last 12 months. You're right. We have got it down underneath what we'd say is theoretical optimum. The dividend is actually up 7% effectively year-on-year. So we have respected shareholders in making that decision. But genuinely, Shaurya, I would sort of sit there and say, we do see opportunities. We've got a lot of duration in our debt portfolio. Our funding costs effectively 70% of our drawn debt being fixed, we're reasonably well protected to a rising interest rate environment from a leverage perspective. So we see ultimately maintaining the capacity to invest and grow the business as being the best way for us to enhance long-term shareholder value. And -- that's been our experience over the last decade, to be fair, I don't see it changing. Now if there was a significant dislocation, we also have the capacity to consider other capital management initiatives. But at this point in time, that hasn't been the focus.

That's helpful. Just a quick follow-up, right? So -- you have said you're okay going 3x -- is that still the line intent?

Look, I think from our perspective, it will depend exactly on what we're acquiring. I think Ryan has been very clear with the market over the last 18 months around I suppose, the attributes of the business that ultimately he would look at, and it would be a quality business, but 1 of those qualities ultimately comes back to the free cash flow generation of that business. So anything that we buy would ultimately support some level of leverage on a stand-alone basis, but the strength of the group is, as we've demonstrated in the half, $1.1 billion of op cash delever, the strength of the existing platform gives us the capacity to take on leverage, acquire a business and gives us time to actually improve the performance and what's been done with Boral's case in point. So we've got that flexibility -- and I suppose it's our confidence around through the cycle, the cash flow generation of those business has been exceptional. The capacity to toggle capital at Coates, the optimization of working capital at both WesTrac and Boral. And the focus of each of those BU leaders on driving those business performance has given us great capacity.

Your next question comes from Nathan Reilly from UBS.

Follow-up questions just in relation to WesTrac. Ryan, I think around the AGM, you were highlighting that there was a degree of maintenance deferral activity, particularly with respect to some of your thermal coal customers. I just wonder if you can give us a bit of an update on that situation, just given the low single-digit volumes which you've seen in the parts and service business. And as a follow-on to that, just given recent improvement in the gold price, copper price and whatnot, just interested to understand what level of demand recovery or just how you're sort of interacting with your customers with respect to future order activity and whatnot in the gold and copper space?

Yes. Thank you. Well, yes, that's a theme that certainly has been playing through. I wouldn't say it's completely resolved, but we have seen a step-up in some of that maintenance. And -- if it's maintenance deferral, we -- I mean we don't love, have to live with it to work around it. But fundamentally, the activity will continue. So that we've always felt that play through, and we've seen some of that step up into the second half, and that's part of the commentary around that outlook certainly in New South Wales. We do see that activity starting to come back. I wouldn't say that, that deferred on our cost control is completely resolved, but fundamentally seeing some of that activity come through with the number of rebuild programs that are WesTrac is completing. The WA has seen a bit of that come through in the iron ore space now, which again, if you look to the commentary made by the large customers that they are focused on costs. And that, again, you start to see some of those decisions around maintenance. And deferment, reduced scope of activity on certain rebuilds, et cetera, that does play through. So we had a little bit of that theme come through, but not of substantive concern. And again, we still feel the overall production volume is still going to determine the end opportunity for WesTrac over time. The activity across gold, lithium, I mean we have got a number of kind of order and discussions around fleet process and fulfillment of fleet orders now in that space. It's a different demand process. And again, 1 of the attributes to think through from a waste track opportunity is the difference in an open cut application versus underground and just the equipment demand required for each. So they're probably the difference in how to think about some of that seeing the rebound in lithium is positive, and that certainly played through in some activity. And gold is good for us, but it really does depend on the type of application open cut, that's really where you've got that much larger volume required to be moved and therefore, that linkage to the opportunity set for us. But overall, I'd say it's resource activities healthy at the moment, I mean, mainly from what we're seeing from an output perspective, but there is a lack process working with customers around how they make sure they're as efficient as possible.

And finally, just an update on Cracks. Can I just get some insight into how much capital is left to invest there and the phasing around that before we move into production?

Yes. We're getting to the point in that, but there's still some kind of capital to put to work. But where, in our view, we think this is kind of an early FY '28 kind of first gas, probably a cost in year dynamic, but fundamentally, our focus will be on FY '28. So effectively, just underwrite 8 months to go in that process. Richard?

I think there's another $150 million to go -- and then there's 1 outstanding issue around walk-to-work vessels, which is being resolved. But other than that, we certainly would our contribution. We're at the exciting part of the process we're seeing. It's come out of the water and top sides will soon be flooded down. So we're certainly moving into the completion of that project.

Your next question comes from Joseph House from Bell Porter Securities.

Richard. Firstly, I'm keen to hear your view on the outlook for construction activity over the next 12 months across infrastructure and resi. Any color you can provide on a state-by-state basis would be great.

It's interesting -- I mean -- and we'll have a degree of insight between coats and Boral and WesTrac 2 degree. But frankly, our insights limited to our activity. So I don't think -- I'd say from a Boral perspective, we're seeing a pretty strong activity outlook and overall demand through for us into North Queensland, Queensland, West Australia, New at Falls and Victoria remained relatively stable, but overall at prestated levels. Still, from my coach perspective, you're seeing a strong outlook across New South Wales in that construction activity. Victoria feels like it's going to settled, it's base, and hopefully, we'll start to see that grow from there. We haven't yet seen a big step up in that resi demand, but we are seeing it as a greater portion of that volume come through within Boral. So seeing signs of that comes through, but not at the volume that we would anticipate to see that supply required to meet market. So we do see that continue to play through. But the Queensland market has been relatively healthy across infrastructure, and resi and I'd say similarly across other jurisdictions. So I feel pretty -- it's a good market. I wouldn't say it's elevated, but it's substantially, but it's certainly a pretty healthy market dynamic at the moment across the construction space.

Great. That's good color. Second question, just around the Coates margin in the first half. I see it's dropped versus the PCP, and that's despite time utilization at 61% above the benchmark. I understand that there is a high degree of operating leverage in the business. Is there anything else -- any moving parts that you can help me piece together, just on the weaker EBIT margin, like I was kind of expecting it could be over 28% just based on the utilization alone.

Yes. Our folks have been on driving utilization because that is a key requirement for the business. Clearly, it's been competitive, and therefore, that's playing through in price. And we need to continue to drive that price leadership value proposition, that's always enable Coates to be a market leader. And that's been a focus. But I'd say the pressure of activity in different markets has been -- had a play through in price. And that's where we've seen timrization hitting target, our financialization behind. So we're really focused on driving that. At the same time, there's been a lot of operational cost efficiencies we're taking out of the business. But that factor on price is probably the real factor. So in our view, the more we can do to drive that, that will have a really positive translation to that EBIT margin because the other cost aspects within the business have been well managed, and we've continued to refine the cost efficiencies, but it's just that's been the differential from a margin perspective. Still the business generated close to mid-teen return on capital is still a healthy return. And I think it's also worth noting that the free cash flow contribution from Coates is strong through the period. So we balance that fleet profile, to what we think is required utilization is right. And that utilization usually you're precursor to drive price. And fundamentally, that's been part of the factor. But we are very focused on how we can kind of get that pushed out price realization.

Your next question comes from Harry Silanis from ANP.

I missed some of the call, at a cash so apologies if this has already been answered. I'm just wondering, is the $29 adjusted bid price for BlueScope final as well as being full and just on that topic, any comments on balance sheet capacity for an acquisition, how far above that target, 2.5x, would you be comfortable pushing that to.

Yes. Look, I mean, we think that, that offers full and fair. We kind of provide that context around that, in our view, that's really up to the Board and shareholders to consider the offering and genuinely think that value today versus the execution risk required something that is -- should be a compelling perspective. But if the shareholders ultimately don't see that, we're comfortable to move on. That's our perspective in relation to the opportunity. In relation to balance sheet, I think it's 2.5x where we'd like to be, and Richard kind of alluded to this earlier that ultimately we very comfortable to go beyond that just given the nature -- cash flow nature of our businesses and our ability to manage and sustain leverage. But we understand the preference around that 2.5x from a leverage perspective. So we do think through that. And if stepping above that, we would want to have some comfort around how we get down to the 2.5x and under -- just through actions that would feel -- would enable that within a reasonable period. So I think that's probably the way we think about that leverage dynamic. And then from there, I think the business free cash flow would naturally delever, Richard?

I completely agree with. I think we've taken the business to over 3.8x, but it's -- I suppose it is our understanding of the performance of the business, this gives us confidence. So it will be transaction-specific. But in terms of covenant headroom and bank support, I suspect the eagerness of the banks to finance is probably going to exceed our Board's willingness to go to that level. So -- but when you're talking 3 would be we would be comfortable, but with a very clear plan as to what we're going to do to bring it back down to 2.5%, and that's the absolute strength of the group.

Just a follow-up on the construction environment. How long do you see that sort of air pocket you previously flagged playing out before sort of new demand comes online from projects such as the Olympics.

I think we do start to see that, that play through -- and honestly, we take a read on the external data points. So ultimately, like it's what the macro monitors and the like who are -- who do the detailed work, give us confidence about that outlook. And I think we'll start to see that through the kind of early commencement activity and the infrastructure activity start to come through. So we're still confident around that. I wouldn't put too much -- I mean, the Olympics will be a contributor, but I think that there are a lot -- there are substantial number of other projects around the country that will continue to drive that infrastructure activity and outlook.

Great. And just sneaking another 1 in. On Boral, just wondering if you could discuss further the opportunity for cost out going forward as we approach the mid-teens target and noticed some press on new workplace laws around Boral concrete truck drivers. So wondering if that's sort of part of the margin story there.

Yes. It's -- for us, I mean there's always a focus on cost efficiency in order to focus on how we can be better. That is just fundamental to the way we operate the Boral -- it is an ingrained culture and how do we constantly kind of improve -- but if we go to the core question, I'd say that the bigger opportunity for us is in getting better variabilization of our cost to activity. So if there are swings and movements in that volume demand that we can variabilize our costs in a more dynamic way. That is going to drive that margin expansion. It isn't about stripping out costs. It's about getting that demand activity match with the business' capacity and ensuring that, that is as aligned as possible. And that's always has been has been a key focus for us within Barn. We're starting to see that work deliver the result, and there's still more to be done across contrary network across quarry opportunities and how we continue to be the most efficient, we can be across each asset. So it does -- there are some opportunities we do still see that margin expansion occurring over time. But clearly, for these levels, the next steps in margin expansion start to moderate, but we do see more potential within Boral.

Your next question comes from Lee Power from JPMorgan.

Just on that Boral commentary, Ryan, can you -- can you maybe give a little bit of color, like you've obviously done a good job driving EBIT margin and your EBIT dollar. Like when we go forward, do you think that there's an opportunity to deploy organic capital in construction materials? Is it more a question of how hard you can run your existing assets?

That's a great question. I mean the fundamentally for us, we definitely see opportunity to invest in Boral to grow and we have been doing that. I'd say the -- we -- yes, -- it's -- when we think about it, it's kind of like -- it's in that -- probably that semi-organic growth opportunities, but Boral definitely. -- investing in quarries, investing in new infrastructure assets, investing in our concrete network, either through greenfield or through acquisition, absolutely key priority for us. We're going to grow across different markets. We flagged -- I think we had flagged the growth we're going to make in WA. We know that's an opportunity for us because we're underrepresented from a share market perspective. So we do want to build some sites and grow there. And some of that we've been investing in the business. The catch-up capital we spoke about, a fact that a lot of that is operational, but a big part of that capital going in the Borals in expanding the opportunity, and we'll continue to do that. It's a business that we need to retain that discipline. But if we do that right, we'll continue to drive growth for us. So in addition to that margin expansion is the ability to kind of grow that network to continue to grow Boral in a disciplined way. I mean, that absolutely it's important that we need to grow in an accretive manner. And that's what we look for and how to complement the network we have, which is the arguably -- not arguably, it is the best construction materials network in the country.

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