SRG Global Limited (SRG) Earnings Call Transcript & Summary

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

Thank you, and welcome, everyone to the call this morning. Today is a really positive day for all our shareholders at SRG. Before I start, I just want to acknowledge our people for those who read the market update recently, would have recognized, really acknowledge our people. I'd like to again acknowledge our people today. It's been a terrific year at SRG Global and really have people stepped up and keep delivering what we stand for as a business; live for the challenge, smarter together, never give-up and have each other's backs. And it is our people that are driving our business and our success, and I want to thank them for all their efforts and their support in the last 12 months. As we move to slides, I always like to start with a bit of us. And for those who are on the market update, we are a different business today and we're a diversified industrial services company. I want to very much emphasize that services side of what we do. And what we do is we bring an engineering mindset to deliver critical services for major industry across the entire asset life cycle of engineer, construct and sustain. And I want to break that down for a second. I'll talk about an engineering mindset. What I'm talking about is a smart technical innovative company that brings value engineering to the table. And these are to deliver critical services. It's not watering the plants, doing the laundry, watering the roads. These are critical services to our clients, critical service such as time-critical shutdown, maintenance, the front-end of the mining cycle in production drill and blast, the engineered facade of structures, the anchoring of dams that protect not only water, but human life. These are critical services. And why that's important, they're critical for our clients. And what that does, that makes us valued and sticky with our clients. And our vision is to be the most sought-after in what we do. Some might say market leader, number one. Now for us, it's been the most sought-after when clients have a challenge, a problem, an opportunity, the first people I think of when they pick up the phone is SRG Global in making the complex simple for them. If we move to Slide 3, our profile. We are a different business today. 3 operating segments, on which we report asset maintenance, mining services and engineering and construction, more than 2,600 people across more than 20 industries across more than 80 sites in 6 countries, a very, very different business. As we sit here today, revenue of circa $645 million in the market cap of approximately $320 million. And I think most importantly, as part of that profile, you can see the ownership structure; 45% institutional shareholders and 12% management and Board. And that runs quite deep when the business that ensures that management are very much aligned to our shareholders, and that runs quite deep within the business, I think drives part of our success. So move to Slide 4, which is the executive summary. Look, I think if you asked to sum it up in a sentence, it's just evidence, evidence of us continuing to deliver and do everything that we said we would do. Now a really, really strong year in FY '22 off the back of a very strong year in FY '21. And if you look at the, I guess, the summarized performance, our EBITDA was up 22%, EBIT was up 36%. And that actually exceeds our top-end of upgraded guidance, really strong operating cash flow with EBITDA to cash conversion of 106%, which continues our strong track record of cash generation and net cash position of $20.5 million. That's after funding the successful acquisition of WBHO infrastructure and continuing to invest in the growth of that business, which is a terrific performance. Our second half fully franked dividend of $0.015 per share is up 50% on the second half last year, which brings our full year total dividend of $0.03 per share, which is also up 50% on FY '21. I think that really highlights the growth of the business, but also the really good fully franked yield that we deliver for our shareholders. Pleasingly, our margins continue to be strong, and that's really underpinned by excellent operational execution across the business. Now one of the things I've been asked a lot in the last one or 2 years, are you buying work, you're winning a lot of work, you're growing. And really what you're seeing is evidence. We're executing well, and we're not buying work. We're winning work based on smarts. A lot of discussion in the last couple of years around labor and cost pressures and the strength and diversity of SRG Global really provides protection. And it really comes down to strength of our business model, where the lion's share of our work is now under long-term contract with [indiscernible] mechanisms in those contracts, but also it's the diversity of the business. So I always say we've got a natural hedge that we're not wedded to any sector, one client, one geography. It gives us a natural hedge in different industry cycle, but also gives us a very broad platform on which to play. And the strength and the diversity of our business is really driving our success. Our work in hand record levels of $1.3 billion, which is up 30%. On this time 12 months ago, we're well funded to continue to drive our growth moving forward with available funds of $127 million. I'll touch on that a bit more later on in the presentation. And I think to really sum it up in a nutshell, the strategic transformation to a diversified industrial services business is delivering results. And really what you're seeing today is further evidence of that strategic transformation. And we're not stopping here. We expect FY '23 EBITDA to be circa 25% higher than FY '22. But to me, it's not about one year. FY '21 was a great year. The year we're now talking about FY '22 has been a terrific year, and we expect next year to be a really strong year again, and we're clearly calling out what we think that's going to look like. But for me, it's about what we're going to do in the next 5 years. And we see really strong growth in the next 3 to 5 years for our business. And this year is really just another step forward in us becoming the company that we know we can be. So if we move to Slide 5 and perhaps what I saw was perhaps some of the key highlights. I think exceeding our upgraded market guidance was certainly a highlight from our perspective and it continues to track record of us upgrading guidance through the year and exceeding it. The successful acquisition and integration of WBHO Infrastructure, really pleased with how the 2 businesses have come together. We had worked together quite closely in the past with a number of joint ventures and have really strong team, well led by Will Grobler and the team. And it was almost like a family coming back together, with really strong cultural alignment and I'm delighted how the business has started and really excited to see what the future is ahead, not only for that business, but the way that the cross-selling different parts of that business and getting across different clients. So it's been a really good start. Record work in hand. I think to me, it's not so much the levels of work in hand, but it is quality, the quality of our business today and the quality of our [ earnings ], I'll touch on that a bit more in a moment. And we are not stopping here. We've got a pipeline of $6 billion in the diverse range of sectors and we've got a very broad platform and multiple organic ways to grow our business in diverse sectors. And I think that creates the platform for a really strong future growth in front of us. If I perhaps move to a little bit more of the detailed financials in the P&L, you can see revenue up 13%, EBITDA up 22%, EBIT 36% and NPAT 57%. But to me, it's the quality. It's the quality of the earnings now is exceptionally strong. We then segue into margin, you can see EBITDA margin was up 8%, EBIT margin was up 20% and NPAT margin up 39%. I mean that's a really exceptionally strong performance from our business, not only in terms of growing the earnings, improving the quality of the earnings, but improving the margins as well. We've increased our dividend by 50% in the last 12 months, which is a terrific return for shareholders and net cash is up 68%, and that's despite the growth investment that we continue to make in SRG Global. I think ultimately, really, really strong year, and we're calling out we're going to grow 25% further in FY '23. So growth on what has been a great year for our business. And I think what that really highlights to our shareholders is the certainty of our future and what we're seeing in front of us. I always like to link results and highlights back to strategy. And really want to, I guess, change gears now and segue into our strategic transformation because that is what's driving our results, if we move a couple of slides forward to slide 7. Now where we were 4 years ago was very much a project-based one-off project-based business. EBITDA is around that $40 million mark. And the challenge with more pure construction-based business is you've got to keep feeding the beast. You've got to keep winning and doing, winning and doing. And so companies like with that type of profile at times, if the work is not there, you feel the pressure to keep feeding the beast, you can flex your risk profile, perhaps get into things that you're not quite good at and work with clients perhaps you shouldn't or in geographies that you're not used to, and it's one that we've really changed the dynamic of the business that we are today. As we move to Slide 8, we have completely flipped the script with more than 2-thirds of our earnings are now annuity recurring in nature. When I talk about annuity recurring, what I'm talking about is long-term contracts. What that drives is certainty, and it brings quality of earnings. It brings a very much a lower risk profile in terms of the future. It gives you that foundation. And then focus on that kind of project-based engineering construction work, where you can really stick to what you're good at, be really targeted and seek to watch a world-class as this transformation has been enormous. And a lot of companies talk about transitioning to annuity recurring. What you're seeing is evidence of us doing that. And that's been done against a very, very challenging backdrop in the last 2 to 3 years. And I think it's an outstanding achievement for our business in terms we've not only grown the earnings significantly, but completely transformed the business that we are today. And if we move to Slide 9, it's really off the back of us executing our strategy. And we've had a very clear strategy for a long time. And what you're seeing is evidence of us continuing to deliver against that clear strategy. We're doing everything that we said we would do. And this whole growth phase is really transitioning the business mix to a newly recurring earnings. And look, if I'm honest, we're probably ahead of schedule in terms of where I would have expected to be at this point in time, and I think it's been a terrific achievement. And that whole growth phase is really driving step change in recurring asset maintenance services, innovation and selective growth in mining services, targeted growth in civil infrastructure construction and remediation, specialist services and products with key repeat clients in the building space, and that holds the 2/3 annuity, 1/3 project-based earnings and we are delivering and doing everything that we said we would do. And what that's driving is if we move to Slide 10, is delivering continued earnings growth. You can see the positive trends both from an EBITDA and EBIT perspective. And if we move to Slide 11, us delivering increased cash and dividends. So you can see the positive trend in terms of net debt to net cash over the last 3 years, and that's despite making significant and continued investments in our business. I think it's been a phenomenal performance from the business and continuing to deliver increased dividends for shareholders. You can sort of see the positive trends, $0.01 in FY '22, in FY '21 and $0.03 in FY '22, driving excellent yield for our shareholders. And to me, it's one of the real pluses of SRG Global is a very much a growth stock, but also a good dividend paying stock as well. If we move to Slide 12, and this really is what's driving -- our success is underpinned by really strong foundation on what we're building. Terrific improvement from a zero harm perspective. Give me any business that's got good safety and good safe performance and generally the P&L will look after itself. Diversity comes in many forms. We are a diverse business. We've chosen to highlight gender diversity this year, and you can see at the corporate level, have pretty evenly balanced, almost 50-50. From an operational perspective, a much more male-dominated blue-collar workforce. We continue to look for new and inventive ways to bring more women into the blue-collar workforce. And I must say here, some of our best engineers are women, but it's something we are looking for new and innovative to bring more diversity into that blue-collar workforce. From a community perspective, really proud of the work we're doing in our local communities from a training perspective, a development perspective, supporting different initiatives. I'm particularly proud of our Bugarrba Indigenous joint venture with Njamal people for scaffolding services. That's one of the first of its kind in that space, and we won our first large long-term contract with Fortescue for 5 years for that particular business. We've got a lot of work on governance and refreshed all our policies in recent times. It's been a real focus for the Board. But ultimately, what's driving our business and our foundation is what we stand for; live for the challenge, smarter together, never give up and have each other's back. It's not the best widget, it's not the smartest strategy that's driving our performance, it's our people and our culture. We work hard at it, and that's what's driving our success. And that really comes down to us living and breathing what we stand for as a business; live for the challenge, smarter together, never give up and have each other's backs. Incredibly proud of the way our people -- it's not only what they do, but it's how they do it and they really live and breathe what we stand for as a business. We got to change gears again now and go into some of the more detailed financials, so I will flick-over a couple of slides to Slide 14. Look, it's been a really strong financial performance. I'm going to focus on margins on this slide by individual business segment. You can see from asset maintenance perspective, a really strong year, EBITDA margins in line with historical levels of sort of 11.7%, a really strong year for that particular business. Mining services, again, another terrific year. EBITDA margins at around that 20%-plus mark, 21%, very much in line with historical levels. Engineering and Construction with an improved performance this year with EBITDA margin of 7.2%. This is an area that we're very targeted on what we do, we're patient. We stick to things that we're good at in sectors, geographies and clients that we do and do work well with them. There's a good opportunity to optimize that business even further. From a corporate perspective, overheads of 2.3% of revenue. We are quite a lean structure. We do think there is some scope to further optimize our corporate overhead leverage as a total group. We are structured to be a bigger business. This is very much a scalable business that we have with executive management board with the experience of running larger businesses. We've got the right systems in place to support our growth as we expand into the future, we think there's the opportunity to optimize that even further. But I think overall, from a margin perspective, I'm really pleased at the progress that we're making in that particular area. If we move on to the cash, the detailed cash generated, it's been excellent cash generation on Slide 15. EBITDA to cash conversion of 106%. You can see the detailed breakdown there, probably key takeaways and obviously continue to invest down into the business from both the growth and maintenance capital perspective. We acquired WBHO in the period, increasing our returns to shareholders, but really driving good cash performance. It's been a huge focus for our business over the last few years. It was probably one of the few benefits of the pandemic was really driving the importance of the front line of not only driving profit, but also delivering cash. That's now very much cultural with our business, and you can see the track record of our cash generation over the last few years is very, very strong, and we expect that trend to continue into the future. And underpinning that is a really robust financial position. We have a strong, but conservative balance sheet. We have available funds of just over $127 million, with net cash of $20 million despite making investment in the last 12 months. Low gearing levels, the lion's share of that debt is actually high purchase debt. And as you can see from our undrawn facilities, there's plenty of capacity to fund our growth into the future. And look, we will continue to maintain a solid, strong balance sheet, but we will be relatively conservative in the way that we operate as a company, which I think is quite prudent given recent times. As we move now into our operating segments, we flick over to Slide 18. Firstly, starting with asset maintenance, which is our specialist maintenance and access solutions business. Look, there's one key takeaway from Slide 18 is just the quality of the client base that we have. It's a blue-chip client base and 70% of these clients, we didn't have 3 years ago. It's been a phenomenal change for our business and then really lays the platform on which to grow this business into the future with a diverse service offering that we have. If we look at the year in review on Slide 19, it's been a terrific year. As I've mentioned, if there's one key takeaway from the asset maintenance year-on-year, it's just the length of tenure of the contracts that we're winning quality clients, but it's the length of tenure, 7 years, 5 years, 5 years, 4 years, 3 years, 3 years, et cetera. We're winning with quality clients in quality sectors, but it's the length of tenure that's the real highlight for the year. We continue to expand from a geographic perspective. I'm particularly proud of the 5-year contract with FMG to Bugarrba, and it's a really good pipeline of opportunities with new clients, but also scope expansion opportunities with existing clients as well on a terrific platform on which to grow. If we move to Slide 20, which is our mining services business. It's our production, of course over the production drill and blast, everything production base is now exploratory work in our geotechnical services business. If there's a key takeaway from our Mining Services business, it's quality of client but also quality of commodity. We play exclusively in gold and iron ore, and it's all production based. If we move to the year in review on Slide 21, another terrific year from our mining services business, really strong operational and financial performance, excellent asset utilization in excess of 90%. We're not a company that goes and buys [indiscernible] on the fence and finds clients. We very much run our assets at high utilization levels and for the right growth opportunities with the right clients we invest, and that's the model that we've had for a long, long time. I think, again, similar to asset maintenance, really good tenure in terms of wins and extensions and a lot of really smart stuff happening around the innovation, particularly around autonomous drilling and also the proprietary data intelligent software that we've created in-house called Orbix, which is now integrated into a number of our clients. It allows good decision-making. It makes us very sticky with our clients. It drives transparency of productivity, but also provide predictive intelligence for the future, and it's one that we continue to develop that sort of smart technical value engineering side of this particular business. The third operating segment is Engineering and Construction, which is really our Civil and Engineering business in the dam, bridge, tank and wind farm space in our specialist building business, which is engineered facades, [ nationally ] in structures here in the West. Again, if you look at the client base, it's primarily government clients in that transport, water and our defense space. And then long-term, 30-plus year partners in the building space being multiplex, land lease and build. If we move to the year in review on Slide 23, if I break down the civil and engineering giving a really strong operational performance, excellent pipeline of infrastructure opportunities in that dam, bridge, tank, wind farm and site infrastructure space. And we now have the highest national road and bridge accreditation of R5/B4. Why that's important is it allows us to do these jobs now in our own right. We would ordinarily have to a joint venture in the past, which gives us double the pie. We successfully acquired and integrated WBHO into our business, which I've already mentioned today and we've got a growing engineered products business and see really good opportunities for that business, both domestically and internationally. These are structural products that are specified products. It's very much an engineering sell into sectors, clients and geographies that we know today. And why I like products is you make it, sell it, you get paid a very low risk profile, a very complementary to what we already do today, and I'll touch on that a little bit more later. On the building side of our business, we're solely focusing on key repeat clients. Look, a really strong year, excellent Work in Hand and a good pipeline of opportunities. This business allow us to successfully enter the defense sector in the last 12 months with this new market for SRG Global and further diversifies our sectors and opportunities and really will be, I guess, the entry point into that particular industry. I think there's a key takeaway from engineering and construction business, that is where we're very targeted. We're very specialist and niche in what we do, and we bring value engineering to the table that is world-class and valued by our clients. Now I'll link back to sort of strategic direction and where we're going. If we move to Slide 25, as I've said earlier in the presentation, we have a very clear strategy and what we will do is continue to execute against that clear strategy and building the most sought after business in what we do. We're very much morphed from the growth phase into the leadership phase as we move into the future and what does that look like, Zero Harm ESG industry leader and recognized employer and partner of choice. I have mentioned Engineered Products. We see that growing over-time and ultimately becoming the fourth operating segment of the group. That will take at least 5 years, but that's certainly the long-term pathway of becoming the fourth operating segment of the group. There will be selective strategic acquisitions to complement our capability of footprint in this particular phase. Some of the things we look at, certainly, asset monitoring, inspection style, work and asset maintenance work, particularly on the East Coast of Australia and potentially, offshore. And also that structural engineering products space, possibly some smaller bolt-on opportunities in that space as we build that business up. But ultimately, the organic opportunity in front of us is significant and that's what's going to be our focus to drive our success, and any acquisition has to be complementary to what we do. We want to keep delivering above-market returns for our shareholders. And ultimately, over-time, the sort of earnings profile of the group will move towards 80% annuity, 20% project based and that's more probably because the inorganic elements that will add to the business will be more in that annuity recurring style space. We have a very strong platform for growth as we move to Slide 26, an excellent work in hand of $1.3 billion, which is up 30%, and that's the quality of the work that we have with clients sectors, geographies and the type of earnings profile, a really good pipeline, further opportunities in excess of $6 billion. But to me, the biggest opportunity for us in the next one to 2 years is really leveraging the existing contracts we have. We've got a very broad platform of contracts now. And if we can just bring in other parts of that business, hate the word cross-selling, but cross-selling other parts of our diverse business into our current client sectors and geographies, that's the opportunity in the next one to 2 years. And to me, that's a terrific base on which to work from and the culture that we have is very much our people thinking one business, one team in the way that we operate. And it leads to a very positive outlook on Slide 27. From an operating segment perspective, asset maintenance delivering step change growth in diverse sectors with blue-chip clients. The mining services operating in high demand, high-quality growth commodities. Engineering and Construction positively linked to significant infrastructure investment in engineering products. It is gaining momentum both domestically and internationally. From a business perspective, we expect FY '23 to be circa 25% higher than FY '22 from EBITDA perspective. The strength and diversity of our business will continue to provide ongoing protection against labor and cost pressures. We've got a really robust balance sheet that will drive and support our growth working capital requirements. The earnings profile in the near term will be sort of that 2/3 annuity in FY '23 and beyond our strategic transformation to a diversified industrial services business will continue to deliver results. We see significant organic growth in the next 3 to 4 years. There's multiple organic ways to grow this business moving forward, and that's really going to drive our success as we move into the future, which is the investment proposition of SIG Global in closing on Slide 28. We have end-to-end asset life cycle capability and being the most sought-after in the niches on which we play. We play in diverse market sectors and geographies, which gives us that hedge that I talked about earlier, it's different inventory cycle, but also a very good platform on which to apply our skills and services. A high level of annuity earnings profile, which brings predictability and foundation and certainty for shareholders, a highly scalable business model with a structure in place to be a bigger business, board, management executive with experience of running larger companies and underpinned by really robust systems that will drive that business into the future. We've got a capital-light investment profile throwing off good free cash flow, and we are a dividend paying stock where we can balance that growth side of the business with the dividend and yield for our shareholders. The company is in the strongest position it's been in my time and the company's real momentum in the business, and we're well underway to becoming the company that I know we can be. It's been a terrific year. It's just another step forward and we think FY '23 will be another step forward again, but it's really about how we grow this business long into the future in the next 5 to 10 years. I'd really like to acknowledge our shareholders for their support in the last 12 months. I'm hopefully, you can sort of see the efforts that our people are putting in and the sort of rewards coming. I think it's a very exciting future that we have in front of us. And in closing, really one and most importantly, again acknowledge our people, they've done a terrific job in the last 12 months. It's been a very good start to the new financial year, and I'm incredibly proud of all their efforts, support and the way that they're just really working together and driving what we stand for as a business; live for the challenge, smarter together, never give up and have each other's backs. Thank you very much.

Terrific. Great. Thanks, David, for that. All right. On to questions. I'll try to group some of the thematics together, again, as I always do. So first one around cost escalation. So maybe the summary of this is that SRG seems to have weathered the storm well in margin profile and from the results that you've just spoken about, David. Do you have any commentary around what we're experiencing right now in the market?

Well, I think the market is starting to [ move ]. And certainly, from a cost escalation perspective, our commercial model, rise and fall mechanisms in our contract is giving us that protection. You can clearly set the evidence of that in our margin performance. So I think it's one that we are managing and managing well.

All right. Terrific. Another thematic around contract wins, been a good number that's been announced recently. And do we expect that momentum to continue on?

Look, I think the short answer is yes. Clearly, we've got a good pipeline of opportunities in front of us, and we expect good contract wins across all our 3 operating segments into the future. So short answer, yes.

Okay. Terrific. Another one around M&A. Clearly, a few ticks around the recent WBHO acquisition. Is the company still active in assessing M&A opportunities at the moment?

I think I probably touched on this earlier. Certainly, it's a focus for us to a degree and really the areas around that asset monitoring maintenance and engineered products are probably areas of interest for us. But to be honest, our focus is more on the organic opportunities, the right opportunities inorganically present themselves just as we showed with WBHO and structural move, and we have the flexibility to be nimble and move quickly where the opportunity presents itself.

Yes. The international market and being part of our plans?

Well, certainly, internationally, we've really primarily put on ice through the pandemic at markets opening back up, again, and certainly part of our medium-term plans. This is what I probably like about our business. The near-term opportunities are more closer to home in Australia and in New Zealand, but certainly, internationally, we've been operating successfully for 30 years, primarily in that dam, bridge and tank space as we speak going back to South Africa and do another dam anchoring job. We've got some ACI work in the US from a dam perspective and certainly from a medium-term perspective, that market will open back up for us again.