SRG Global Limited (SRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SRG Global half 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 good morning to everyone, and welcome to our FY '25 half year results call. But before I begin, I really want to acknowledge our people. There will be many of our people on this call today. And they've done an outstanding job in the first 6 months and really living and breathing what we stand for as a business: live for the challenge, smart together, never give up and have each other's backs. And this result is a testament to their leadership and all their work. And I can't thank them enough, and I'm incredibly proud to be working with them. So thank you. I might just move now to Slide 2. I always like to start a little bit about us, particularly for those that are newer to the story. Who are we? We're a very diversified infrastructure services business. And the key there is the diversity of our business and what we do. And what we do is we bring an engineering mindset to deliver critical services for major industries. And when I'm talking about an engineering mindset, what I'm talking about is being smart, technical, innovative and specialist. For us, it's delivering critical services to our clients. It's not about doing the laundry, the catering, the landscaping, it's about delivering critical services for our clients, which makes us critical for them, and we do it across the entire asset life cycle of engineer, construct and sustain. And what we want to be, our vision is the most sought after in what we do. Some might say #1 market leader. For us, I want our clients when they have a challenge, a problem, an opportunity, the first people I want them to think of when they pick up the phone is SRG Global and us making the complex simple for them. So we move to Slide 3. We have 2 operating segments, Maintenance & Industrial Services and Engineering & Construction, and this really aligns the profile of the business that we are today, which is a good segue into Slide 4, which provides our profile: nearly 4,500 people across more than 20 industries; revenues of circa $1.3 billion and a market cap of roughly $900 million; an 80% annuity recurring earnings profile; and you can see the geographic split of the group, 50% East, 45% West and 5% in New Zealand. It really shows you that presence and the footprint that we've built today, a very, very different business. So we move now into Slide 5, which is the executive summary of the results. And really, what you're seeing today is evidence, more evidence, of us delivering and doing everything that we said we would do. It's a record result. Our first half EBITDA of $59 million is up 31% on FY '24; our EBIT is up $42.1 million, up 48% on first half FY '24; terrific returns to shareholders; earnings per share is up 35%. And one thing we've done really well as a business is really bounce that growth and providing dividends to our shareholders. Our interim fully franked dividend is up 25% to $0.025 per share. And really underpinning that and driving that is our excellent cash generation. EBITDA to cash conversion of 120%, we transitioned back to net cash of $9.1 million from net debt pro forma after the Diona acquisition of $38.2 million, which is a phenomenal achievement by the business and really continues our strong track record of cash generation, which is average circa 100% over the last 4 years. We announced in the half the acquisition of Diona. It feels like a long time ago that Diona joined the family, but it's only been since the start of September, and I'll touch a bit more on that throughout the presentation today. And what you're really seeing today is strong evidence of us continuing to win and execute well. We've got record work in hand of $3.4 billion, which is up nearly 80% on this time 12 months ago. We're at that 80% annuity recurring earnings profile, which is very much in line with our strategy. And what that gives us is that platform and visibility into the future. And as part of this, we are upgrading our FY '25 guidance to an EBITDA range of $125 million to $128 million and an EBIT range of $91 million to $94 million, which really shows the strong growth profile of the business. We're continuing to grow, but it's very much consistent, high-quality growth, and you can really see the confidence in the business and where we're going. This is a stellar set of results, a terrific achievement. Again, a shout-out to our people for really driving this performance, but we're in an incredibly strong position as a group. So let me now move into some of the more financial details. We'll move over a couple of slides to Slide 7. You can really see that as a company in the first half, really strong in every line, revenue up 21%; EBITDA, 31%; EBIT and NPAT, roughly 50%. And look, pleasingly for me is a really strong margin percentage performance. In some ways, the numbers don't do justice to the quality of the performance. And then the margin percentage improvement is really a testament to really high-quality growth. And you're really seeing that top line growth being driven down into bottom line performance and really, the benefit is becoming a much more capital-light business. Now it's a true indication of the quality of the business we have today. As I mentioned before, EPS up 35%. A real highlight is our cash performance. The overall fundamentals of the group are exceptionally strong and gives us that really strong fundamentals to keep driving the business and sustainable growth moving forward. Look, I always link that back to strategy. And really, what you're seeing today is more evidence of us delivering against what's been a very, very clear strategy for a long period of time and us doing everything that we said we would do. I think most importantly, as we move to Slide 8, this is just not a one-off performance. And really, what you're seeing, for those that like their visual on Slide 8, is year-on-year on year-on-year of driving terrific performance, a really strong track record of delivery: profits up, earnings per share up, dividends continuing to grow, and that really positive trend. And when we move to Slide 9, for those that are more detailed and numerical minded, you can really see the performance and just the transformation of the business. There is not a line on that page that we haven't absolutely belted out of the park, whether it's revenues, profit, margin percentage performance, dividends, earnings per share. For me, we've delivered on every metric. And really, it's, again, evidence of the transformation of the group. To me, a real highlight is that 80% annuity recurring. But ultimately, you're really seeing that track record of winning and executing, but also that track record of really high generation of cash that's really driving and funding our growth and providing good dividends to shareholders. And that's a terrific performance as a group. And again, it's another brick in the wall and that ongoing uplift in us doing everything that we said we would do. I talked already about cash that really, you can see on Slide 10. The movement from net debt to net cash and that EBITDA to cash conversion of 120%, really high free cash flow really continues our really strong track record of performance. You can match profit with good cash. And clearly, you're seeing that that's what we're doing as a group. And what that is really providing us, as we move to Slide 11, is a really robust financial position. Available liquidity of $229 million, and we've moved back into a net cash position of $9.1 million, which is a terrific performance. And it's really going to give us that funding to really drive the growth of this business moving forward. And I think the overarching message here is strength and balance sheet strength, while truly really maintaining that flexibility as we move forward to really drive the growth of this business, both organically and inorganically. But most importantly for me, as we move to Slide 12, which to me is the key slide in the whole deck. It's really underpinned by a really strong foundation as a group. I always say it's not the best widget, it's not the smartest strategy that drives performance, it's culture and people, and it's us living and breathing what we stand for: live for the challenge, smarter together, never give up and have each other's backs. Now the reality is life is not perfect. Business is not perfect. And when a moment of truth arrives, it's how you live and breathe what you do. These are not words that sit on a page; for us, that sit on the wall. This is how we live and breathe every single day, and that's really driving our performance. And I always say to investors, that's what you're investing in. You're investing in what we stand for as a business. It's not the service, it's not the strategy, it's our people, it's our culture and it's what we stand for as a business. As we move to Slide 13, which I'll touch on environmental, social and governance. And for us, the key message here is we keep it real, and it's how we make a difference. Again, we're sharing just some of the examples of what we do in the space from an environmental perspective. Our Workiva Carbon software platform, which is really about tracking our emissions and really driving those down. We've got a number of sustainability initiatives. These are some of the examples such as green concrete, local tree planting, solar-powered facilities. But ultimately, it's about smarter designs with our clients and how we really drive their operations, their footprint and their performance to make a difference. And from a social perspective, I'm really proud of the work that we're doing. Bugarrba Aboriginal Joint Venture is progressing exceptionally well, and I'll touch on that during the presentation. It's all around how we partner at local communities. We've got a number of social partnerships, such as Clontarf, Mates, Shooting Stars, Cancer Council, Telethon, and a lot of other local community initiatives of which we operate and be a good social partner. Now from a governance perspective, a really robust set of risk management framework. I'm particularly proud of the work that we're doing in the psychosocial space, which is an issue not just in business but also in society. I'm really proud of the work we're doing from a safety perspective. I always call it the glass ball in business that you can't afford to drop. Every day is a new day. Our TRIF is 2.5, which is industry leading. It's the lowest it's ever been, but it's the glass ball. Every day is a new day, and it's something that we don't celebrate because you start every day at 0. But I'm really pleased with the leadership that our people drive about keeping everyone safe and going home at night. I'm now going to switch gears a bit and go into the operating segments. We might move over a couple of slides to Slide 15. And you see from an operating segment perspective, really strong performance across both operating segments. You're really seeing evidence of an excellent operational execution, along with delivering really consistent margins, a terrific performance from a maintenance and industrial services perspective, and really driving that consistent targeted performance in the engineering and construction space. So we move to Slide 16, which is the Maintenance & Industrial Services side of our business. You can sort of see some of the core services that we do today. And look, I think that there's a couple of key takeaways from Slide 16. It's the quality of the client base. We very much have a blue-chip client base. It's also the diversity of the services and industries on which we play in. It's a really, really robust part of our business. It's the largest part of the group with a really terrific client base. So we move to Slide 17, which is, I guess, the half in review. You're really seeing evidence of excellent performance and step-change growth. A number of new long-term contracts secured with organizations such as the Department of Climate Change & Energy, SA Water, Fonterra, Transport Victoria, South32, Hanroy, Origin and Rio Tinto, some of the examples of new contracts secured in the period. You're really seeing the evidence of the geographic spread and the diverse industries on which we play in across both Australia and New Zealand. We've had the successful acquisition and integration of Diona, and I'll touch on that a bit more in a moment. And our Bugarrba Joint Venture is really going from strength to strength. It's the Aboriginal Joint Venture in the access services space in the Pilbara, and it's really growing and growing in a very strong, disciplined and robust way. On the Engineering & Construction side of the business, again, you can see some of the core services on which we provide for what's very much a specialist business in nature with world-class skills. Again, if there's a couple of key takeaways, it's really the quality of the client base again and really, the fact that they're all repeat clients. Across the entire group, we announced nearly $1 billion of new work in the first half of this year. And the reality is it's all with repeat clients, which to me is really good evidence of delivering for clients and how we take the complex and make it simple for them in driving our performance. So we move to Slide 19, which is, I guess, the first half in review for Engineering & Construction. Again, really pleased with the strong execution of our first major R5/B4 project at Jervis Bay, which is our integrated road and bridge project with Transport New South Wales. Progressing really well, we only recently attained that highest national road and bridge accreditation. And what that really allows us to do is to do this in our own right for any sort of key transport project where there's an element of complexity to it that we can provide our specialist skills. Our Facades business, again, an exceptionally strong half. We are the absolute market leader in facades across Australia and New Zealand with key repeat clients and really working on a number of iconic structures. Our Engineered Products business continues to incrementally expand and grow, and it's an area that we like. These are all infrastructure and structural strengthening products. And underpinning the overall Engineering & Construction business is just a really robust commercial framework. Early contractor engagement model, really well established with our blue-chip client base, these are all repeat clients, and it really manages the risk profile and sticking to things that we are world class at, so we can be very targeted and disciplined on what we do. As I mentioned earlier, we acquired Diona on the 1st of September, and effectively successfully completed. It's now fully integrated into SRG Global from a systems and processes perspective. We've had a number of significant new wins in the first 4 months, particularly with the Department of Climate Change & Energy and SA Water, very much delivered to business case in the first 4 months with a really strong outlook for FY '25 and beyond. And look, most importantly for me is that really strong cultural and client alignment with numerous cross-selling opportunities. And for those that have heard me speak previously, our focus very much when we acquire a company is really ensuring that the cultural alignment and embedment is super strong. It's terrific people, terrific leadership and really very much part of SRG Global family with a number of really strong pipeline of opportunities in what are great growth markets in water security and energy transition. So very much on track, probably exceeding expectations of what we've communicated to the broader market, but with the quality of the people and the quality of the business, it's certainly not a surprise to us internally. Just to probably refresh people on why we did it as we move to Slide 22. It very much strengthens our position, our market position, in water security and energy transition, which are both growth markets; really complementary capability and skills, which really enhances the offering to our key clients and that really strong culture of cross-selling; a high-quality management team with a proven track record of over 40-plus years; really enhances our annuity recurring earnings profile, very much aligned to our strategy; a really strong work in hand and a terrific growth pipeline; and a very financially attractive acquisition, which for numbers that, in reality, are better than what we communicated to the market, previously combined with a very capital-light investment profile. If we move to Slide 23, just to really refresh on what Diona does. It's very much a full service program offering, everything from really engagement advisory, community engagement, design and engineering, program management, delivery and asset management, really across 2 key segments, in water and energy transition. And I think in a nutshell, the best way to describe what Diona does is specialist in ground services, which are critical services to our clients for critical infrastructure, very much aligned to the SRG Global business model and strategy. Now from a client perspective, they're very much a low-risk collaborative commercial framework, long-term agreements. We've given some examples of key clients that we have, very, very strong East Coast presence, which really highlights also the very obvious geographic opportunity in WA and New Zealand, but very much deeply embedded with what are common and complementary clients, along with, as we move to Slide 25, really strong markets with high growth, strong tailwinds and significant spends coming up not just in the next 3 to 5 years, but in reality, over the next 20- to 30-plus years as we move into the future. So we're delighted with the staff, really proud of the culture interaction between the group. It feels like we've been together for 4 years, not 4 months, and it's really driving what we expected as a combined group, which is a good segue into the way forward, as we've moved now a couple of slides, to Slide 27. We've got a very clear strategy. And really for me, almost feel boring putting up this slide because this is something that has been a very, very clear strategy for a long period of time. And what you're seeing again today is more evidence of us continuing to deliver. The growth phase will very much now morph together with the leadership phase. And it's a very clear strategy. We're very focused on what we do. We're very disciplined in what we do. We don't deviate. I think that's been one of the real strengths of our business over the journey in the way that we've transformed. We know what we want to be. We know what we don't want to be. And for us, post today, it's about getting back to work and continuing to deliver and execute against a very clear and a very simple strategy that's well understood internally. And what that's driving, as we move to Slide 28, is really the ability for us to keep delivering sustainable growth. We've got a terrific platform. It's really now about leveraging the footprint. We've got work in hand of nearly $3.5 billion, a terrific pipeline. We've upgraded guidance. That 80% annuity recurring earnings profile gives us that really strong and stable platform to then be very, very targeted on the sort of more project-based work. And what that's really driving, as we move to Slide 29, is momentum. A really strong performance. We upgraded guidance. Work in hand, I've talked about. We've got positive exposure to a number of really high-growth sectors such as water, defense, energy, resources and transport; that sort of 80% of annuity recurring profile in '25 and beyond. And our transformation to a truly diversified infrastructure services business is going to keep delivering, consistent growth and high-quality returns to our shareholders. So again, for us, it's about continuing to keep doing what we said we would do. And I think that's the ultimate investment proposition of SRG Global as we move into the next slide. We've got end-to-end asset life cycle capability where we self-perform everything that we do. We play across diverse market sectors and geographies. I always say that gives us a natural hedge. We don't rely on any one sector, one client, one geography. We have a very, very broad platform on which to apply our skills and grow. We've got a very highly scalable business model with people with experience, systems, structure and processes to be a larger business than we are today. Again, you're seeing evidence of that. We always set ourselves up structurally to be a bigger business than we are today. So when we get there, we execute well and you really see more evidence of that today. High level, the annuity earnings profile, that really makes us predictable, consistent and the right risk profile, along with a very capital-light investment profile with CapEx circa 2% of revenue. And we're a very high-yield dividend paying stock, and I think that's something we've done really well over the journey in terms of being very much a growth stock, but also a good dividend paying stock as well. The company is in exceptionally strong shape. I really want to thank all our shareholders for their ongoing support, and most importantly, again, really want to thank all our people for continuing to step up. The company is in a very, very exciting position. We've got a very bright future in front of us. It's now getting back to work and continuing to build the business that I know we can be. So thank you.

Great stuff. Well, thanks, David, for the presentation. That's strong and awesome. So over to the question session.

So as Travis mentioned before, feel free to take questions in, of which we already have a few. So the first one, I'll cover, obviously, around our cash conversion number of 120%. There's a number of questions on that front. So it's around cash conversion of 120%, and our expectations around the second half and beyond for cash conversion. And maybe I'll start off, and Dave you can cover also. But I think we've obviously demonstrated a really strong track record of cash conversion in the last few years. We're not in the business of providing cash guidance necessarily. But I guess we've always talked about cash being a factor of, over a number of years, demonstrating really strong cash culture, which is what we've got; demonstrating that circa 100% cash conversion, which what we've had over the last few years. And we'll continue to have that focus. For us, what's really important is that we have a cash discipline within our business that's focused on the very basic principles of cash, claims, cash certifications and then cash collections. And I think for us, that's continuing on. And I think we feel the second half will be a continuous strong cash conversion period as well. I don't know if you'll add anything else.

That's all good, yes.

The second thing around new road and bridge accreditation that's opening up to larger contracts in size than before or more frequent wins.

Well, I think the reality is it's really no change in strategy, but what it does, it just gives us the flexibility to do things in our own right. We had a high bridge accreditation, but a low road accreditation, and just really didn't give us the flexibility for some of those really specialist bridge projects where there's a small road component, which is generally the easier work. So it really just gives us access to the whole pie. Whether it opens up to more frequent wins, I think that for us, it's more about being just targeted and focused on what we do. But the reality is the contract sizes will be double because ordinarily, we would joint venture.

Yes. Terrific. A couple of questions on Diona. So Diona's performance in the first half is obviously strong. And what's your view around Diona's performance into the second half and beyond?

Yes. Look, I think Diona, we've got a 4-month contribution from Diona. We were pretty modest in our outlook for Diona when we made the acquisition. The reality is it's growing. It's growing more than that. It's probably pretty much in line with sort of in that sort of 10%-plus range from a growth perspective in FY '25, but it will also be a 10-month contribution in 2025 as well, so not a full year. Look, for us, to me, I get more excited around the cultural integration of the group. But clearly, it's a growth business. We've demonstrated already that it is a growth business. And I guess we're, call it, conservative in nature. But when we made the acquisition, we acquired the business based on what it had done, not what it was necessarily going to do. And that's really always our investment model and thesis in terms of when we look at companies.

Yes. Terrific. And a question around SRG performance ex Diona. The view around the first half obviously was strong and the view on the ex Diona contribution for SRG's business going forward in the second half and beyond.

Well, look, I think we've provided guidance for the full year, which is upgraded guidance. We're continuing to grow exceptionally well. And I think the business will continue to grow. We see ourselves as a growth business over the next 3 to 5 years, and that will continue. We provided very clear guidance to the market to make their investment decisions. And I think we've done that again today.

Yes. And a view around targeted growth, EBITDA growth in FY '26 and beyond.

Look, I don't think today is about giving guidance for FY '26, but we expect to be a good growth business. If you want to use a proxy, probably 8% to 10% would be a good starting point for FY '26 and beyond and how we think about the next 3 to 5 years. But today is not about guidance for '26. Today is to talk about FY '25 and the continuing strong performance of the business.

Yes. And the current work in hand for Diona from the time we bought it.

It's probably around that $1 billion.

Yes. $1 billion-plus market opportunity.

With a couple of the wins there as well, so a really good business, a highly accretive acquisition. again, I think what it just shows you is the evidence of us, we've grown exceptionally strongly over the journey organically, and you've really seen again clear evidence of that today. But we've also shown a real track record over the journey of acquiring businesses well, but most importantly, integrating them well. And I think the key component of that is that really strong cultural integration and that's really what drives the performance and the coming together. And I think you're seeing some really strong evidence of that today.

Okay. Terrific. Margins for the MIS, Maintenance & International Services, segment as well as the Engineering & Construction segment was solid in the first half. Your outlook on margins for the second half and FY '26 for each division.

Look, I think our margins will be pretty consistent. Really pleased with the margin percentage performance. I think they're really at the top end of the industry and one that really highlights, I think, the strong operational execution of the business. So I think margins would be sort of around the mark whilst obviously a decent uplift from '24 to '25 in terms of our first half, and I think that will be consistent moving forward.

All right. Awesome. Are you able to elaborate on defense opportunities?

Look, I think it's something that -- as I sort of said earlier, we play across diverse industries. Defense is the newest sector to us. It's one we've probably been playing in for about 18 months or so. I think we'll turn over sort of circa roughly around that $50 million mark in FY '25 in the defense space. And clearly, there's some significant spend coming up. Really, what it opens up for us is the ability to provide all parts of our business. So I think a lot of the key spend is more going into FY '27, FY '28 and beyond story, but the hardest part is penetrating that market. We've got a solid footing. But that's one of the things I like about our business is that ultimately, it's one lever to grow. We've got multiple levers on which to grow the business both through service but also sectors on which we play. In many respects, we're almost sector agnostic in terms of where we can apply our skills. And clearly, defense is just one sector with some really strong tailwinds moving into the future, and we plan to play a part.

Okay. Size and type of acquisitions that SRG are looking at.

Look, we will continue to grow the business organically, but look at inorganic things that can unlock further value to shareholders. And I get too hung up on size, which is probably pretty important when you're 5 foot 9, but to me, it sits less around size. It's more around how does it fit with strategy, how does it fit culturally with the business. But you kind of see a pretty good feel for the size of businesses that we bought in recent times. But again, it's more around the strategy, the service and the cultural alignment that I look at first and whether it unlocks further value for us as a business. The size to me is really irrelevant in that regard.

One around dividends. Obviously, it'd been a good dividend half, in the first half, your view on dividends second half going forward?

Look, I'm not going to provide guidance on dividends. Clearly, first half dividend was 25% up on first half last year. We've got a really strong track record of paying dividends and increasing our dividends over the journey. I think slide sort of 7 or 8, I think Slide 8 sort of showed the track record of dividend. And certainly, our plan is to be a good growth stock, really fund that growth. We also pay good dividends to shareholders as well.

Yes. Okay. I think that's the end of our questions. So terrific. I'll end the call here. Thanks very much, everyone, for joining the call. And thanks, David, for the presentation, and we'll talk later. Thanks, everyone. Bye.

Bye.