Wagners Holding Company Limited (WGN.AX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Wagners' Full Year FY '25 Results Webinar. My name is Sam Wells from NWR. And joining me from the company today is Managing Director Cameron Coleman as well as Chief Financial Officer, Fergus Hume. Following a brief summary of the update released to the ASX yesterday afternoon, we will have some time for Q&A with the management team. There will be a choice of 2 options: first, research analysts are able to raise their hand via Zoom, should they wish to ask a verbal question of the management team, or we'll also take written questions via the Q&A function at the bottom of your screen for all investors. We will endeavor to get the majority of questions asked in some cases, combining questions on the same or similar topic. And with that, I'll pass it over to you, Cameron and Fergus.

Well, thanks, Sam, for the introduction, and thank you to everyone who's dialed in this morning to listen to our full year results presentation. As Sam mentioned, I'm here with Fergus Hume, CFO. In summary, it's been a strong 12 months, and the business has performed well. We've delivered a strong EBIT result, and it's been really pleasing to see the growth come from our Construction Materials business and our Composite Fiber Technologies business. The group's revenue for the year was $431 million (sic) [ $431.3 million ]. And while this is down on the prior year due to the completion of that large precast tunnel project we had in FY '24, the group has delivered earnings growth. Improved margins across the Construction Materials and composites businesses have enabled us to deliver an operating EBIT of $41.8 million, and this is a 9% increase on FY '24, where our operating EBIT was $38.3 million, a great achievement given the reduction in project services revenue. This result has been driven by improved market conditions, both pricing and volume, together with operating efficiencies with increased utilization of assets across the Construction Materials and CFT businesses. Net profit after tax for the year was $22.7 million, significantly higher than the prior corresponding period, which was $10.3 million. The strong operating cash flow generation has enabled us to fund $15 million in land acquisitions during the year to be used for future concrete plans, while still reducing our net debt to $34 million. which is a reduction of $13.6 million compared to FY '24. And given this performance, the Board has declared a full year dividend for FY '25 of $0.032 per share. I'll take you through the performance of each of our operating segments, starting with Construction Materials, which again has delivered improved results. The revenue run rate experienced in the first half continued into the second half, with the business delivering a full year revenue result of $257 million, which is a 19% increase on the prior year. Cement volumes remained stable and the business has delivered improved revenue and EBIT margin growth through pricing improvements and operational efficiencies. Our concrete revenue was up 54% and the business delivered an EBIT result that was a significant improvement on the prior year. This improvement was driven by an increase in volumes, strong market conditions and a disciplined operating environment. The growth in the concrete business is adding value across the whole construction materials business through our vertically integrated supply chain model. As concrete volumes improve, so does the performance of our cement, quarry and transport businesses. Margins continued to improve across this segment as we realized the benefit of good operating discipline through the period. We've continued to execute our growth strategy in concrete with 3 greenfield sites purchased during the year for future plans and another site now under contract. The construction of 2 plants is underway, and they'll be completed and servicing the market later this calendar year. The quarries business also delivered improved performance with a 30% increase in revenue and 46% growth in EBIT. The quarry in Southeast Queensland was a significant contributor to the result, with the investment in the plant upgrades, providing additional capacity to service increasing demand and production efficiencies driving improved margins. Moving on to the project services. The decline in revenue compared to the prior corresponding period was anticipated and reflects the cyclical nature of large project work. While Bulk Haulage revenue was down on the prior period due to the completion of 2 projects, an improved EBIT margin in the second half enabled us to deliver an EBIT result for the year that was consistent with the prior period, despite the lower revenue. I'll now move on to the composites business, and this business is really starting to deliver on our expectations. Overall, revenue for the segment was $68.4 million, which is a 15% increase on last year, and it delivered an EBIT result of $9.8 million compared to $400,000 in the prior period. Looking at the Australia and New Zealand business. The growth in revenue has been driven by an increase in Crossarm volumes, particularly the sales into New Zealand and the increasing demand for power poles has really ramped up. The business has also delivered improved margins across all product lines, particularly power poles due to the manufacturing efficiencies we've achieved as our volumes ramp up. Pricing discipline, targeted project selection and operational efficiencies also delivered improved margins in custom build which is the area that services the pedestrian infrastructure and road bridge markets. The strong demand for CFT products and improved margins have delivered a great result for the Australian business. As I mentioned at our half year results, the capital that we've invested into this business is now providing the returns we anticipated and we are manufacturing and executing projects such that margins are now meeting our expectations. We continue to be focused on improving these margins as the operational efficiencies achieved during the year become embedded. Similar to concrete in the Construction Materials segment, pricing discipline, particularly in custom build has also been key to delivering these results and remains an ongoing focus for our business. It's been pleasing to see the improvement in our U.S. CFT business. Revenue has improved on FY '24 with a number of new projects that have been delivered throughout the year, and there has been a significant reduction in the losses with the rightsizing of the business and a real focus on operational efficiencies. The U.S. business does still need significant uplift in volumes to reach breakeven point, and that is our current focus. I'll now hand over to Fergus to just take you through the balance sheet and cash flow.

Thanks, Cam. The FY '25 balance sheet is showing an improvement in the working capital of over $12 million mainly as a result of the improved collection of receivables. The net debt has decreased by $13.6 million with a gross debt reduction of $9.3 million, together with an increase in cash of $4.3 million. It should be noted that we have managed to reduce the net debt and significantly increased our capital spend, including over $15 million on land for future concrete plant sites. With a net debt-to-EBITDA leverage ratio of less than 1x and term debt facilities only drawn to 35% of our limits. We are well placed for growth opportunities, including the ongoing expansion of the concrete plant network. On to the cash flow and a good cash conversion for the operating results has resulted in good operating cash flows. Significant capital expenditure was made during FY '25, particularly during the second half, $36.6 million for the year and $28.2 million in the second half of FY '25. The capital expenditure was a mix of growth and replacement spend. The growth spend was primarily on the fixed plant concrete business with over $15 million on land for new plants and $3.8 million on plant development and mobile equipment and plant upgrades in quarries and CFT. The replacement spend was on trucks for the Bulk Haulage project business and the Construction Materials haulage and cement and quarries. Also spent on cement storage replacement and some light vehicles. The improved cash conversion has been used on the aforementioned capital expenditure and the reduction of gross debt, and we've also recommenced the payment of dividends in FY '25. So I'll pass it back to Cameron now to give you an update on the outlook.

All right. Thanks, Fergus. Market growth is expected with the Olympic infrastructure requirements and the strong residential housing sector in Southeast Queensland. In line with this growth generated from the anticipated busy construction sector, cement volume should increase, particularly from Wagners owned plants. Margins may be impacted a little by FX fluctuations and increase in raw material costs. However, generally, we see a very strong market ahead. Our concrete plant network will be expanded by an additional 3 plants during the full year. As I mentioned, 2 of them will be operational by the end of this calendar year. and we'll also increase the capacity at our Pinkenba concrete plant, all of this driving volume growth. Some impact to earnings can be expected during the start-up phase of the new plant sites. However, volume growth at the existing plants will improve our utilization and assist with margin expansion. The expansion of our Southeast Queensland concrete plant network will remain a focus, and we will continue to look for sites for further plans that align with our strategy. Quarry volumes are also expected to increase based on both our secured pipeline and expected market demand. The prior capital investment into this business particularly at our Wellcamp quarry in Southeast Queensland, will continue to deliver improvements in capacity, product mix, production efficiencies all resulting in improved margins. In project services, at this stage, there are no new projects secured to deliver any material revenue in FY '26. The Bulk Haulage business is expected to deliver slightly lower revenue and earnings in FY '26 with the completion of those 2 contracts I called out earlier. We will, however, continue to pursue new opportunities domestically and internationally, and the business remains well positioned to respond to these opportunities as they arise. In our CFT business, Australia and New Zealand utility networks will provide an increased demand for CFT power poles, and cross arms that are already -- this is already evident from the orders received in July and August. The increases in volume will again improve utilization of the plant, further improving our margins, particularly in power poles where we anticipate the most growth. The business is also exploring further automation in the production process of polls similar to what we have done with our Crossarm automation line, which will again drive further improvement in the margins and longer term as this technology is developed. Our current volume forecasts beyond FY '26 are showing that we will need to increase capacity at our manufacturing facility at Wellcamp to service the expected growth in the business. This means that capital will need to be spent this year, building additional 2 Pultrusion machines to create the required capacity to service an upcoming market. Further improvement is also expected in our USA business. There is a solid pipeline of work secured for the year, which will result in an increase in revenue compared to the prior year. Manufacturing efficiencies will also improve margins in custom build projects and we are extremely positive about the opportunities that utility networks in the U.S. provide for our composite power poles. Like the Australian business, to meet this anticipated demand for power poles, it is likely we will require an increase in the current manufacturing capacity. This will enable us to manufacture all product in the U.S. and avoid the expensive freight costs and tariffs we are currently associated as we ship product -- we are currently subject to as we ship product from Australia. We do acknowledge that there is still some work to be done in the U.S., and we will need a significant uplift in revenue to achieve a breakeven result. However, we are excited about the opportunities for this business. And just on CapEx, there is going to be a step up in CapEx in FY '26 to enhance capacity and support the future growth of the business. We're investing in a number of new concrete plants with the construction of some already underway and additional sites may also be acquired. We are upgrading some of our storage facilities at Pinkenba, which will provide operational efficiencies in the cement production process and we are going to have to invest in additional plant capacity in CFT, both Australia and the U.S., as I've just mentioned. So in summary, we're pleased with the performance for FY '25. The growth in the underlying Construction Materials segment and in our CFT business has been positive. Volumes have remained strong throughout the period. However, it's been the improvement in margins, driven by excellent operating discipline along with positive market conditions that has enabled the delivery of this positive earnings result. The construction sector, particularly in Southeast Queensland is a great environment to be operating in with the amount of activity taking place, which should only increase driving demand for our products and services. We've got a great team of people working at Wagners and are proud of the products and services we are delivering to our valued customers. The company has invested heavily in assets, which are now driving improved margins. So that really concludes the formal presentation for today. So again, thank you for joining us. And as always, Fergus and I are happy to take any questions you may have.

Great. Thanks, Cam. [Operator Instructions] The first question on CFT, great to see improved profitability in CFT. How did operational efficiencies aid in both Australia and the U.S. business? And what further improvements are you targeting in those businesses?

Well, thanks, Sam. The operational efficiencies really come as volumes ramp up and you get that ability to get excellent utilization out of the machines. We've still got a little way to go as far as operational efficiencies go on our power poles, as I called out. We do need to embark on a more automated process for the final processing of the poles. However, we've been really pleased with the production output of the plant and the machines are certainly working as the nameplate sort of specification said they should.

Great. And on the plant network, you've highlighted $15 million of new land purchases. Can you walk us through the motivation here? And what comes next on these sites?

Yes. So in the last 12 months, we've been really working hard to acquire sites in areas where we can't currently service the market. So there's 1 to the west of Brisbane. There's 1 to the south of the Brisbane, CBD. There's another 1 that sort of joins the gap between Pinkenba and the Sunshine -- well, the Pinkenba and Narangba up in the Caboolture area. So our focus has been to identify the areas that we can't currently participate in concrete sales and secure land and build concrete plants on those sites. So what comes next, is 2 of the sites will have operating concrete plants before Christmas with a third one in the second half. And then in addition to that third one, there will be a significant upgrade made to the concrete plant at Pinkenba, which will improve our capacity there, the small batch plant we have at Pinkenba is running at full capacity, and there's plenty of opportunity to increase sales through further investment there. And I guess, the driver, the question around what are the drivers for this is, and I mentioned it in my speaking notes earlier, the vertically integrated model and the value that is achieved through concrete sales, through to aggregates, flyash, cement, haulage is really, really important to our business. So the driver is to support that vertically integrated supply chain model through additional sales.

Right. Next question will be from Max Andrews at Unified Capital.

Can you hear me okay?

Yes, Max, we can hear fine.

Well done on the result. Just on the safety business, obviously, a strong second half result, particularly on margins. I just want to understand the drivers behind this and if margins have further upside, also just on the planned CapEx you have in '26. Just some color on where the demand is coming from. Is this more power poles or custom builds?

Yes. Okay. So the margin growth has really come out of production efficiencies as we've started to build out the production capacity of the new Crossarm automation line. The efficiencies we're achieving in that Crossarm automation line have been really impressive, and it's starting to really perform well. And then the other area is just the utilization of the 2 machines that we put in to build power poles given the high level of activity we're experiencing in the power pole market. They're probably the 2 areas that have moved the dial the most in CFT. And then in conjunction with that, it's been that targeted selection process on our custom build activities, the pedestrian infrastructure and road bridge area. We've taken a really sort of concentrated approach to target work that fits our profile rather than just be everything to everyone in that business.

Cool. And just another one. With the concrete strategy you got going on, obviously, you'll need fair amount of aggregate. Do you have enough kind of capacity at your current quarries to feed this future demand? Or do you think you might need another quarry?

We won't have -- the Wellcamp quarry won't be situated to economically get aggregate to all of the Southeast Queensland plants. It certainly covers quite a few of them. So we currently source some aggregates from third-party producers to the north of the Sunshine Coast and down into the Gold Coast. We do have a greenfield quarry site just west of Brisbane. And at a point, our volumes will get to a level that will justify the investment to open that quarry. So it's currently sitting there, ready to go. And we just need the volume to underwrite the capital expenditure required to start that site. We also have another site to the north of the Sunshine Coast, and that's exactly the same scenario. We will open that when the volume is appropriate.

Awesome. That's great color. And just the last one. Obviously, a bit of momentum in May and June with the dry weather. Just wondering if this has kind of continued in July and August.

Yes, is the answer. July was our largest concrete sales month. So the momentum has certainly continued. There was the Brisbane show holiday and those type of things certainly put a bit of a kink in our tail. However, there's no doubt at all that, that momentum that we saw in May and June has continued on into this year.

Next question from Liam Schofield at Morgans. Liam, are you there? No? Okay. Next question, are the U.S. tariffs an impediment to CFT in the U.S.?

Quite the opposite, Sam, they -- the tariffs are really a situation where manufacturing in the U.S. is certainly much more favorable these days. So we're up against sort of stainless steel, timber structures. I know the tariffs on steel have created a lot of issues for many infrastructure service providers in the U.S. So all of our glass and resin is sourced locally in the U.S. And the tariffs have no impact on our business. while we're getting new product lines to market and sending products from Australia to seed markets, we're certainly subject to tariffs and high shipping costs. But as we ramp up our production capabilities in the U.S. Tariffs are not an issue at all. And if anything, probably assisting us a little.

Okay. Great. And a couple of submitted questions from Liam at Morgan. Can you please talk about the unit economics of the batch plants. What does adding a new batch plant do for group earnings?

It depends on the area that you put it. But the main benefit for us putting concrete plant is the cement and flyash pull-through that we put into it from both of our cement and flyash businesses. And if it's close enough to a quarry where we're supplying the aggregate, it pulls through from the aggregate business as well. At a concrete plant level, we've seen a turnaround. The prices are probably still got some room to move up, but they've moved up into a position where at a concrete plant level. We are making money at the concrete plant gate if we can get the right volumes but you're getting 100% of the pull-through profit on your cement and your flyash. And if it's close enough to service with 1 of our quarries, we get the aggregate pull-through as well.