SRG Global Limited (SRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SRG Global FY '22 Market Update Investor Briefing. [Operator Instructions] I would now like to hand the conference over to David Macgeorge, Managing Director. Please go ahead.

Thanks, Travis. I'd say, first, I'd like to welcome everyone to the call today. Today is a really positive day for the company, and it's all around giving our investors a market update on how we're performing and where we're going. But before I get into the highlights of today, I really want to acknowledge our people. There will be a lot of our people on this call listening in today. And today is really off the back of their performance and achievement. And the one thing that they've really done in the last 12 months is step up and really live and breathe what we stand for as a business, live for the challenge, smarter together, never give up and have each other's backs. And I think what you're seeing today is clear evidence of our people living and breathing what we stand for. And what I'm really talking about there is culture. And to me, in business, it's not about the best widget or the smartest strategy, it's having the right people and the right culture to deliver, and then it's having the focus and the discipline to execute. And to me, today is clear evidence of us continuing to do what we said we would do. And I want to thank our people. I'm very proud to be part of this business, and I'm proud to go to work every day with the people that we have. So we might start with the key highlights on Slide 2. As I said at the start of this call, it's a really positive day for our business in terms of how we're performing as a company. Starting with the first half point, FY '22 EBITDA is expected to be the top end of our previous guidance of $54 million to $57 million, which is really positive in terms of how we've concluded the year. Today is not a -- we haven't gone through the audit process fully at this point in time, so today is very much a high level overview. And we'll go a lot more granular in the full year results. Underpinning the EBITDA performance is really strong operating cash flow with EBITDA to cash conversion of circa 105%. And that is really evidence of the continued strong cash generation in the business. And that's been a massive change for us in the last 2 or 3 years. The net cash positive movement for us has been significant. And that cash generation has continued and kind of see our net cash position is now $20.5 million. That's after funding the acquisition of WBHO Infrastructure in March of this year, and it's something I'm really pleased with. I mean there's profit and then there's cash. And I think I've said on previous calls, one of the few benefits of the pandemic in our business is really driving the understanding of the importance of cash in the business. It might sound like common sense but can be quite heavily focused on profit, but it's also around ensuring that is underpinned by cash and cash generation. And that is very much part of our DNA, and we've consistently generated really positive operating cash in the last 2 to 3 years, and we expect that to continue moving forward. I think also pleasingly, the margin performance has continued to improve, and it's really strong again in the second half. If you recall at the first half of this year, our EBITDA margin percentage went from 7.2% to around about 9%, and that performance has continued in the second half of this year. And that's really underpinned by really disciplined and focused operational execution. Look, it has not been an easy environment on which we've been operating in, in our businesses and a disciplined focus of our frontline leaders, in my mind at the kings and queens of our business, that's how we support them. And their disciplined focus on execution is really driving that margin performance. But I think it also runs a little bit deeper than that. If you look at the strength and diversity of our business today, it's really providing that protection against labor and cost pressures. That's very much a hot topic in the market today. But if you look at the strength and profile of our business today, very much more towards that annuity recurring style long-term contract type business. And what that provides is that sort of risk protection around having risen for mechanisms in your contracts. They're very much linked to the site-based cost, which gives you really complete protection against those costs movements where you can pass those through, and that's really allowing us to continue to drive our margin performance. And today, you're seeing really clear continued evidence of that. And I think also the other strength of our business is the diversity of the business. We're not weighted to 1 sector, 1 geography, 1 client. It's the strength and diversity of what we do. And certainly, in pockets, there's challenges around labor, but the holistic business is giving, oh, it's called the natural hedge. The diverse nature of our business is we're not weighted to 1 area, and it gives us that natural hedge in terms of not being exposed but also gives you a very broad platform of opportunity in which to grow and drive the business moving forward. Look, I'm not saying there hasn't been challenges around labor and cost, but it's one that we've stepped up and managed and continue to manage well. And really, the margin performance is terrific evidence of that. WBHO Infrastructure is now successfully integrated into SRG Global, and I'm really pleased with how that has started. And it's really to me, the focus in the first 2 months has more been around the cultural alignment. And we knew coming into acquiring WBHO Infrastructure here in the west that terrific people, terrific leadership, a really strong business. We've worked closely together for everything. So you know that cultural alignment was there. And I think Will and his team have done a terrific job in the first few months in terms of really engaging in the business. And we're already seeing evidence early on in terms of that engagement, the cross-selling opportunities, the new skills that they bring and new clients that they bring that we also provide opportunities as well. And I'm really pleased with how that has started today, and I'm really bullish on where that business goes within the SRG family. So look, terrific business, and I'm really pleased at how that has started. And I think FY '23 will be a really positive year for that business. There's a good segue into work in hand. We've got record work in hand at $1.3 billion, and we've got really good funding with available funds of $127 million. And I really want to hone in on this work in hand for a moment because what it provides is really clear visibility moving forward. And when you think about the nature of our earnings profile today, it gives us very clear visibility into the future, which allows us to provide some very clear forward-looking views, which I'll touch on in a moment. But I think also, it's really important to understand that we are winning a lot of contracts and good contracts with good clients, but they're very much contracts that fit within our skill sets, within our geographies, and it's very much aligned with our strategy and what we do. And what that provides us with is the opportunity moving forward to really just focus on what we have and cross-sell other parts of that business in when some of that ad hoc work where your fixed cost base is already paid for so the margin accretion is better. And then if we focus just on that in the next couple of years, the growth trajectory will be really, really strong for our business moving forward. So that's really all in front of us, and it's about execution and really looking after the key clients that we currently have. I think ultimately, the strategic transformation of SRG Global to a diversified industrial services business is delivering results. And you're seeing clear evidence of that today. And I'll touch on in a moment the strategic transformation of SRG Global. It has been significant. We are not the business today that we were 3 or 4 years ago. And I think ultimately, we're expecting FY '23 EBITDA to be circa 25% higher than the FY '22 EBITDA result. I think that conveys a number of messages. It conveys confidence. It conveys certainty of the outlook moving forward. But it's not about 1 year for us. We're continuing to grow the business, and we see a really strong growth profile for SRG Global over the next 3 to 5 years. FY '22 is a really good year. FY '23 will be a really good year. But it taught me about the growth over the next 3 to 5 years and really executing the strategy that we've had in place for a long period of time. So look, a really pleasing set of results and highlights, but I really want to perhaps shift gears now and sort of segue a little bit into strategy and just the strategic transformation that we've undergone as a company. So we flick a couple of slides to Slide 4. This really highlights where we were 3 or 4 years ago, very much a business that was very heavily weighted to projects and one-off construction projects. So very much -- those types of businesses, it's very much about feeding -- you need to keep feeding the bush. You need to keep winning, finding new clients, finding new projects. And if you look at the profile of the business, about 30% of it was annuity recurring term and about 70% project-based. That was 3 to 4 years ago with a sort of circa $40 million EBITDA financial performance. If you look at us to where we are today as we move to Slide 5, we've completely flipped. More than 2/3 of the company's earnings and our annuity recurring in nature. When I talk about annuity recurring, I'm talking about long-term contracts. It's very much -- it's an enormous change. A lot of companies talk about transitioning to annuity recurring. What you're seeing is evidence of us delivering against that. And it is not only seeing the evidence of that, it's the quality now of the revenue and earnings that we're generating is very, very different in terms of its risk profile to what we were 3 to 4 years ago. And that's been done against a very, very challenging backdrop. And I think, again, that is evidence of culture and our people stepping up and really engaging with the strategic transformation that we've been embarking on. If we move to Slide 6, it's really all about executing what has been a very clear strategy for a long period of time. Now this is not new. This has been a very, very clear strategy and pathway that we've been on. In some ways almost feel like I'm borrowing in some ways, I'm talking about the same strategy again and again and again. But it's about the discipline and focus and execution of that strategy. That's what's driving our performance. Very much in the growth phase of that strategy and what do we say we're going to do was about step change growth in recurring asset maintenance services, innovation and selective growth in mining services, targeted growth in civil infrastructure construction and remediation, specialist services and products in building construction with key repeat clients. And really, the key plank of this growth phase is really transitioning this business through an annuity recurring style business with 2/3 annuity and 1/3 project-based. And if we move to Slide 7, what you're seeing is clear evidence of delivery against that strategy. We are doing everything that we said we would do. And in my mind, we're probably a little bit ahead of schedule in terms of where I would have expected to be at this point in time in terms of just making that complete shift in terms of the earnings profile and the risk of our business and the quality of the earnings that we now have. If you said to me 3 or 4 years ago we'd be going through a pandemic and delivering against this, I probably would have thought it would be a bridge too far. And I think today is really clear evidence of us delivering against that strategy. And it is a phenomenal performance. I think for us, it's about staying humble, disciplined and focused. But it's also reflecting on how far we've come. It's not something I'm great at. I'm generally always looking at where we're going next, but really reflecting on how far we've come, and the strategic transformation that we've made is significant. And the business we are today, as we move to Slide 8, is not the business we were. And this is us today. And we are a diversified industrial services company. And I want to talk about the diversified industrial services. I think the strength is the diversity and very much a services-orientated business. And what we do, we bring an engineering mindset to deliver critical services for a major industry across the entire asset light cycle of engineer, construct and sustain. And I want to break that down a little bit further. When I talk about an engineering mindset, I'm talking about a business that is smart, technical, innovative and really brings that engineering DNA to approach -- the way it approaches business. And it's to deliver critical services. This is not fitting out kitchens, watering haul roads or doing the laundry. These are critical services for our clients. Critical services such as time-critical maintenance, relining of furnaces in production facilities, the anchoring of critical water infrastructure such as dams, specialist transport infrastructure in complex bridges, engineering of facades for hospitals, schools, universities, stadiums, car parks, shopping centers and commercial towns. It's the front end of the production mining cycle in production drill and blast and geotechnical services we drill around ground stabilization. So these are critical services. And why that's important for our investors to understand is when they're critical, they've got to be done right. And to me, it makes us very sticky with our clients because they're critical to our clients and they value them. And that to me is what we do is we provide critical services, and that to me is something that really is ensuring that we have very deep relationships with our clients. And I said earlier around our work in hand, if we just focus and really service deeply the clients that we have with the footprint that we've grown today, the opportunity and the growth in front of us over the next few years is significant. And our vision, what we want to be is the most sought after in what we do. Some might say market leader, #1. For us, it's about being the most sought after in what we do. So when our clients have a challenge, a problem, an opportunity, the first people I think of when I pick up the phone is SRG Global. And what we pride our ourselves on is making the complex simple, bringing that engineering smart, the engineering mindset, making the complex simple for our clients. The business we are today is not the business we were. If we move to Slide 9, I think you'll see evidence of that in our profile today. We have 3 operating segments on which we report on asset maintenance, mining services and engineering and construction. We have more than 2,600 people across more than 20 industries, which really highlights the diversity of the business and that diversified industrial services company we are today across more than 80 sites in 6 countries. FY '22, it will be circa -- revenues of circa $650 million. FY '23 is going to be around that $800 million mark. And we're a market cap of $295 million. But I think it's also important for our investors to understand is the deep engagement from management. And if you look at the ownership structure of SRG Global, a circa 12% of the company is owned by management and Board. And that runs quite deep within the business. So very much we had leaders and deep within the business that are engaged and aligned with our shareholders and shareholder interest. And I think that really helps drive that whole cross-selling mentality and bringing other parts of our business together with each other. I hate that word cross-selling, but it's very much that, that's what's delivering our success, and that's what will drive our future moving forward is taking the diverse services that we have and really servicing the clients that we have today. And I think you can see from the profile, we are not the business that we were. I want to switch gears again now and move into where we are going for the future. If you look at Slide 11, where we are sort of around that $57 million EBITDA mark, 2/3 annuity earnings. If we move to Slide 12, this is a 1-year look forward. We expect earnings to be circa 25% higher than FY '22, which is a really strong -- it's an incredibly strong growth year in front of us. And clearly, we're conveying a lot of confidence coming out in July, stating that the market -- and that is off the back of really good visibility moving forward and really, I guess, how we're seeing the market play out for us. That's a 1-year lens. But ultimately, it's about us continuing to build the business we want to be, and that's -- we move to Slide 13. It's about building the most sought-after diversified industrial services business. We are very much in the growth phase of that strategy. It's a very, very clear strategy that we're executing against. We will, over time, walk into the leadership phase of that strategy, and we're delivering against a number of those elements already today, 0 harm industry leader, a recognized employer and partner of choice. In this leadership phase, we will be growing the Engineered Products business across all SRG operating segments both domestically and internationally. When talking about engineered products, I'm talking about engineering and structural products that are specified products in the infrastructure and the mining space as well. And why do I like products? It's a growing business for us. In FY '22, it turned over circa $30 million. We've just moved our manufacturing facilities to a purpose-built facility in Sydney. And I'm really bullish on products because ultimately, it's about servicing the same clients we have today, the same sectors we play in today and the same geographies that we play in today. And why I like products is you make it, you sell it, you get paid. So it's very much the risk profile is very, very low from risk -- from a commercial risk perspective, but it's really selling -- cross-selling into industries and geographies that we play in today. And this business has made a terrific leap forward over the last 12 months. And then I ultimately see this business becoming the fourth operating segment of the group in the next 5 years. And that's, I guess, a long-term look ahead in terms of where we are taking that business. In the leadership phase, we will look at selective strategic acquisitions to complement our capability or our footprint. One of -- perhaps some of the key areas of focus in that regard, certainly, asset services is one, particularly on the East Coast of Australia, was continuing to grow that area of the business, certainly areas in terms of annuity can we add to that particular mix. More mechanical maintenance capabilities probably another area of potential focus and also like monitoring, asset monitoring inspection where you're monitoring structures and you're then executing the work at the back end. So that's probably another area. And if the right things present themselves, we will look at them. But ultimately, for me, the organic opportunities are so strong in front of us that strategic acquisitions have got to make sense. And I think you can see our financial performance, the strength of our balance sheet. We are in a strong position, but we're under no pressure. And it's got to be very much aligned to us culturally and very much aligned to us from a strategic perspective. We want to deliver consistent -- continue to deliver consistent returns. And we ultimately see over time as the products element of the business grows, we're sort of more towards an 80% annuity recurring style business and a 20% project-based earnings business. But this is a very clear strategy. We've had it in place for a long period of time, and we'll continue to be focused and disciplined in executing against that strategy, which I think as we move to Slide 14, it's a good close in terms of ROE, which is the investment proposition of SRG Global. We have end-to-end asset light cycle capability. We still perform pretty much everything that we do. We have a high-end capability. We play in diverse market sectors and geographies. And I talked -- touched on that earlier. That diversity gives us strength. It gives us that natural hedge that we're not exposed to any 1 sector or geography, but also gives us a broad platform on which to play. We have a high level of annuity earnings profile, which brings -- lowers the risk, brings certainty and visibility for investors moving forward. And at the right point in time, it will attract the appropriate multiple valuation. We're a highly scalable business model. You can see that we've been able to manage and execute the growth of our business, and we'll continue to do so moving forward. And we've structured the business to be a larger business than we are today. I think you're seeing evidence with operational execution, margin improvement within the business. We can grow the business, we can scale the business and we can execute. And we are structured to be a bigger business than we are today. Pretty much a capital-light investment profile, which will generate good cash. Free cash flow will be really positive, and that allows us to be a good -- not only a good growth stock, but also a good dividend-paying stock, paying really good fully franked yields and really can bounce that kind of growth element and the dividend-paying elements as well. So I think to me, the company has never been in a stronger position than we are today in mind now 8 years with the business, an incredibly strong position. But in our view, we're just getting started in terms of what I think this company can be moving forward, and it's about being humble, focused and disciplined and continuing to deliver and step up for what we stand for as a company, which is live for the challenge, smarter together, never give up and have each other's backs. I really want to thank our shareholders for their continued support. I think it's a very exciting journey in front of us. I think the growth trajectory is really strong moving forward, and I really thank them, if they're on this call, for their ongoing support. I particularly want to thank our people. I'm very proud to come to work every day. And you keep stepping up and delivering and I'm really excited for us to see how we continue to build this business moving forward. Thank you.

Great. Thanks, David. It's Roger Lee here, CFO. So I'm going to take over on the Q&A management side of things. So there's a few questions here. Thank you, David. That was well done. With the endeavor to cover as much as I can, there are some common themes here. So I will try to group them up. So the first one is around cost escalations and inflation and wage increases and how they're being managed in the new contract pricing, do contracts and provisions to allow for these increases.

I think it's a very topical one. I touched on it a little bit in the presentation. In terms of the lion's share of our contracts -- of long-term contracts that have risen for mechanisms in them generally linked to the site, which is really important in terms of being linked to the actual site-based costs, and that's something that with those rise of more mechanisms in the contracts, it allows us to pass that cost on to our clients. You obviously have to manage it and perform, but it gives us that real protection in that arm. And I think you're seeing, I guess, the continued performance of the business against that sort of cost escalation. The margins we're generating is giving us that protection.

All right. Awesome. Thank you. The next one is just around are there any unusual items in the margin outcome that's one-off, et cetera?

Really simple answer. No.

Yes. Yes. Another one around the engineered products, something you covered that off already there in the discussion.

Roughly '22 is about $30 million. Yes.

Yes. Another one on the Mining Services EBITDA performance. I think that's a really strong one. We've covered that off. The improvement in the work in hand, how is the pipeline looking?

Pipeline is really, really strong. We expect to win more contracts moving forward. The horizon is really, really positive for us. But again, the opportunity for us is not just on winning new contracts, it's about really with the footprint that we now have to cross-sell other parts of the business to win that ad hoc work by being on site. And I think moving forward, as the operating environment becomes easier, that should help with margin as well. So it will come across a broad range of growth. A lot of these things won't be announceable events. And I think that's really important for shareholders to understand is that we have a really positive pipeline. But if we just focus on our contracts, well, that will drive a lot of our performance in the next 2 to 3 years. And clearly coming out at the start of the year with a 25% uplift outlook in early July really conveys that confidence of our trajectory.

All right. Terrific. Another couple on cost inflation, and I think we've covered that off, David. Another one here. Great to see the focus on culture, margin, cash flow, recurring revenue, great outlook. Some comments around WBHO. You touched on being purchased under administration. What's the outlook for FY '23 for that business?

Yes. I think I've sort of called out -- I mean FY -- our focus in the first few months is really getting the business integrated. If you recall, how we bought the business, it was via a deed of company arrangements and we only took on contracts that are either cost plus or schedule of rates. So that's less certain fixed cost contracts behind that brought the people along with us. So the first few months was more around the business washing its face and sort of building the business back up. So we expect FY '23 to be a really positive, profitable one and cash generative view for that arm of the business.

Yes. Yes, for sure. And just some more flavor around the defense sector that we're playing in and the view of it from an option perspective and this year?

Look, I think it's -- what I like about our business, we play across a broad range of industries. And as we've sort of shown in our profile, defense is a newer one. For us, we've now started penetrating that market in sort of our structures and facades business, and we think there's really good opportunity across the broad range of services that we offer across the group. So I think that will only open up more opportunities for us to cross-sell other parts of our business across the country. And look, it's one of a number of sectors as we've got good positive growth -- macro growth drivers.

Yes. Terrific. One on dividends. Wouldn't be a meeting with investors without a question on dividends. What's your view on dividend rates? Is there a set policy for dividends?

Clearly, we're going through the full year results. And we -- as I've said earlier, we have no set policy, and we generally pay that sort of 50% to 60% range. I think our first half dividend was $0.015 after $ 0.01. The previous half, our full year dividend last year was $0.01. I think first half this year was $0.015. And look, I'm not going to give guidance on dividends, but you can see the cash generation, the commentary around wanting to be equal dividend-paying stock, and we think we can manage the balance of that, then you would like to think we'll be a good dividend-paying stock in the second half as well.

Yes. I wonder on our geography and our way we generate our revenue and what's our view around the where -- which geographies are going to give us the most best opportunities?

Look, I think it's across the board, across Australia and New Zealand are probably the lion's share where we play. Today, we put a lot of our international work on ICE through the pandemic, but the international market is now starting to open up. For us, again, we're about to go back to South Africa to do another dam anchoring job. And certainly products sort of in that U.K. space is another area that we're playing in to some degree today. And then more broadly, areas such as the U.S. for dams, we're doing some ECI work in that region of the market as well. So really, from my perspective, internationally, not really factoring in really anything in the FY '23 outlook, anything meaningful from the international perspective, but really more see that as a medium-term growth driver for us. We've been able to operate successfully internationally now for over 30 years. We focus much more closely to home through the last 2 to 3 years for very clear reasons. But that market will open up for us again, and we're structured the right way that will be more around doing certain projects and getting out, which will generate really good margin for us. And generally, when we do projects internationally, they perform really, really well. So it's more a medium-term play.

Yes, yes. I think you covered off another around the international market, being part of SRG's plans going forward and I think very much.

Absolutely.

And just looking through to see if I missed anything. Just probably one last one around managing access to labor and how we're managing that and as well as the people retention element.

Yes, probably break it down in 2 parts. I mean the labor is obviously a very hot topic. And certainly, we are very spread and diverse business, which gives us some natural protection, but certainly in pockets, and labor is more challenging, and it's one that we're managing and managing really well. It's -- I wouldn't say it's easy, but we're managing it well. When you look at the profile of our business, a much more heavily weighted to a long-term contract style business. It kind of attracts a different personality, someone that likes that long-term certainty and 10-year lots. So I think whilst our operational HR team has done a terrific job bringing people in as we have continued to grow our numbers significantly, I wouldn't say it's easy, but there's a lot of paddling happening under the water is one that we're doing -- are doing well. I think SRG is a really good proposition for people wanting to come to work and that all comes down to culture. And when you talk about people, it's quite interesting. I've just done an internal sort of road show across the business and haven't been able to do that really in the last 2 to 3 years. And whilst video is great, the power of face to face is really important. And it was really -- I know it's uplifting for me personally, but probably similar to this call. But it was very much about sort of how we've transformed and the business we are today. And just the buying and engagement from our people was really uplifting for me personally, just how engaged they are. They can see the holistic strategy and how it's coming together. They've all got an opportunity to have a voice and play and really contribute and they see how they fit into executing the strategy and the growth of this business. And to me, that gives me more confidence than ever that we're on the right pathway and just culturally just how strong we are and just how people are all driving our business moving forward. It was a fantastic couple of weeks, and there's still more to come. But to me, I'm not a big believer in checkbook HR. Ultimately, if you're doing that, then to me, you retain people based on culture and being a good place to work for and people having the opportunity to be part of something bigger than themselves and being able to see how they contribute and achieve their own goals in their career as well. And I think SRG Global does a terrific job in that regard and obviously comes down to the people that we have in our business.

All right. Terrific. I think that's about it. So thank you, David. I hand over to you to close that.

I want to, again, thank everyone for the call. It's a good day. We'll have some more granular detail at the full year results. We'll probably just stop given the sort of water market is worth providing an update on where we are and where we're going and look in our view. We're just getting started in terms of where we're going and that we're going to be humble, focused and disciplined in the way we execute moving forward. And we've got really clear pathway on where we're going, and we're looking forward to you continuing to benefit from the journey we're on.

Thanks.