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

Ladies and gentlemen, thank you for standing by, and welcome to the Wagners half year results briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Mr. Cameron Coleman. Thank you. Please go ahead.

Good morning, everyone. Welcome to today's presentation to discuss our results for the past 6 months. Fergus Hume, our CFO, is here with me today to run through our presentation. As you can see, the first half of 2020 has been extremely disappointed -- disappointing. Our first half results are low due to no major project work being undertaken; the loss of cement volumes due to the dispute with Boral, with sales only resuming in late October, along with increased pricing pressure in the concrete and cement markets in South East Queensland. Some positives to come out of the half include our transport revenues and profit continuing to grow as expected, with more opportunities arising throughout the half. Our CFT results have increased compared to the prior corresponding period with international expansion and some large projects won in our local market. We were awarded 2 large projects, the Adani quarry services package and the Cross River Rail tunnel segment supply. Total sales have decreased compared to half year '19, with lower cement volumes due to the Boral dispute being partially offset by increased sales from improved volumes in concrete and quarries, along with the growth in our Bulk Haulage and CFT businesses. The Boral dispute was heard in the Supreme Court of Queensland earlier this month, and we await a judgment on this matter. Revenues from both large domestic and international work was significantly less than the prior corresponding period, which has had a negative impact on our performance. The South East Queensland cement and concrete market has seen a large disruption with downward pressure on pricing. We undertook a successful rights issue of $40 million during this period. On Slide 7, as you can see, our Construction Materials and Services results have been negatively impacted. I'll walk through these in more detail on the following slides. So as I've previously mentioned, our cement business has been impacted by our dispute with Boral. The South East Queensland cement market has become increasingly competitive due to reduced volumes, resulting in price pressure. We now have 6 operational concrete plants and an additional 3 sites that we have secured. To establish this network of concrete plants, we have invested heavily in people, plant and equipment, which has impacted this period's results. While we have suffered losses in the start-up of our concrete plant network, our concrete volumes continue to grow as a result of this investment. We have taken action on improving our sale prices and are avoiding loss-making volumes. Whilst the South East Queensland quarry business is subject to similar pressures that we're seeing in the cement and concrete markets, we are focusing on gaining operational efficiencies across our quarry assets. Our Transport revenue has increased due to increased activity in the resource sector. We currently have 9 significant contracts with increased utilization of our existing fleet. This does, however, lead to increased maintenance costs as warranty periods expire and the fleet ages. Due to project commencement timing, revenues from both large domestic and international work was significantly less than last year. The BD efforts made in this period will see us well placed to grow the business in the year ahead. We have secured a large contract crushing and bulk haulage project in Central Queensland for Adani that will provide significant revenue in FY '20 and '21. Our precast business is well positioned to deliver strong results on the back of securing the tunnel segment production for the new Cross River Rail project awarded in December 2019. I'll move on to our New Generation Building Materials business, Slide 10. Revenue and EBIT have both grown in this period compared to the prior corresponding period. This is pleasing to see given our investment in research and development also increased in this period. I'll go into a bit more detail on the following slide. So this business continues to grow internationally as consumers become aware of our products. Our CFT electrical crossarm customer base continues to grow as new clients in Western Australia, Victoria, Tasmania and New Zealand realize the benefit of our technology. Our investment in our global CFT sales force has delivered a significant increase in external sales of bridges and boardwalks. We have diversified and expanded our customer base and geographic markets. Our new pultrusion machine has arrived in the U.S.A. and will be commissioned over the next 2 months, allowing us to manufacture in-country. Moving on to EFC. We've recently completed commissioning an EFC activator production plant to allow us to further protect our IP and allow us to produce our product more cost effectively. DIBt approval was granted in this half, providing building standard approval for EFC in Germany, allowing asset owners and engineering firms to specify EFC without the need for third-party investigation and approval. This has resulted in increased inquiry and opportunity for our product across Europe and the U.K. Since obtaining this approval, we are now engaged with 4 companies in London, 3 of which have now completed their field trials using EFC, and the fourth company is scheduled to carry out their field trials in the coming weeks. Our work in India to obtain BIS approval, or the Indian standards approval for EFC, is progressing well. With all laboratory-based concrete samples cast, submitted and undergoing testing, our partner, JSW has now built a dedicated batching plant, allowing us to supply EFC to larger-scale applications within the JSW organization, which is a very similar model to that we adopted here in Australia. We have supplied in excess of 5,700 cubic meters of EFC throughout this half. I'd like to draw your attention to the next slide, Slide 13, which shows the EFC being used in a concrete paving machine, building the airport taxiway for the new Queensland -- Qantas training -- pilot training academy. I'll now hand over to Fergus to walk us through the consolidated results in a bit more detail.

Thanks, Cam. We'll have a look at our consolidated results for this half. Our gross profit is 5% lower than the corresponding prior period at 55% and is mainly as a result of the prior corresponding period, including significant contributions from a large concrete infrastructure project in our mobile concrete business and a large -- and larger contributions from the cement business. This project-based work and the cement business achieved higher margins compared to our current revenue mix. Our operating costs have increased by $4 million compared to the prior corresponding period. Repairs and maintenance costs have increased mainly due to increased utilization of our transport and quarry assets. We've also incurred higher subcontractor costs to support the short-term contract work in the transport and quarries business. We've also incurred significant legal costs as a result of our litigation. The adoption of AASB 16 has had a $1.4 million negative impact on our earnings this half. This is mainly due to long-term nature of some of our property leases, but it hasn't had a cash impact. So it should be noted that without this reporting adjustment, we would have reported a profit after tax. Now to the cash flow. The cash flow has been impacted by the lower EBITDA and negative working capital movement. The working capital position is mainly impacted by higher debtors as a result of some large invoices raised in December, following the award of new projects that Cam mentioned and completion of construction of some concrete plants. Majority of these monies have since been received and used to reduce debt. Capital expenditure is reduced compared to the prior corresponding period due to reduced CapEx on transport projects. The major spends this period were on increased CFT manufacturing capacity and some stay in business CapEx. All that capital expenditure remains within our approved limits. On to the working capital and net debt. As previously mentioned, our working capital has increased as a result of increased debtors. We've since received the majority of the outstanding debtors and expect the working capital to reduce to the previously observed levels. Our net debt has decreased compared to the 2019 level. The capital raise has allowed us to pay down debt. This has partially been offset by CapEx spend and concrete plant build costs, which will subsequently be sold. In the short term, we expect to maintain this level of leverage with an outlook to reduce following the resumption of cement supply and the increased project-based work. We continue to have access to funding sources sufficient to fund our growth strategy. I'll now pass back to Cameron to provide an update on our outlook.

Thanks, Fergus. We acknowledge the outlook for Construction Materials and Services business is challenging. However, there are some opportunities. As mentioned, we've secured the $40 million Cross River Rail project, which represents significant value to our entire Construction Materials business through vertical integration. The renewable energy and resources sector continue to provide opportunities for our bulk haulage, contract crushing and mobile concrete batch plant services. We've secured some more long-term bulk haulage contracts in this period and currently have several other opportunities under tender. We remain committed to the LNG space and are tendering several large LNG gas processing projects around the world. And if we're successful with any of these bids, they represent significant value to our business. We expect the cement and concrete market to be -- to continue to be challenging. We've not made any allowance in these numbers presented today for a favorable outcome from our litigation heard earlier this month. The outlook for our New Generation Building Materials business remains positive. In CFT, we'll continue to invest in R&D to further develop new product lines, such as the round composite pole, which we've successfully manufactured and sold in this half. The assembly of our new automated crossarm manufacturing line is progressing well and will allow us to triple our production output. This will provide some significant cost benefits in the production of all crossarms. The establishment of our U.S.A. composite manufacturing facility in Texas will allow us to comply with the made-in-America requirements. We've appointed a crossarm sales agent in the U.S.A. and are looking to utilize the manufacturers' representative model in all U.S. states as our sales strategy. And now on to our Earth Friendly Concrete. We will continue to invest in this business, both in R&D and geographical expansion. As I mentioned earlier, DIBt approval was recently obtained for EFC in Germany, a major step towards revenue generation of this product after years of R&D investment. Also, I mentioned earlier, we have already conducted some field trials for EFC in London and expect to perform more trials in this month. We look forward to our partner JSW in India using EFC in a number of internal projects, showcasing the benefits of our technology while progressing the Indian standards approval for the product. Apart from South East Queensland, it is not our intention to be batching EFC in well-established concrete markets around the world. We will commercialize our technology through partnering with interested parties globally through a variety of models, including sale of activator and admixture, licensing, exclusivity rights and royalty arrangements. While we have identified and secured a number of significant opportunities, the timing of these projects, coupled with the challenges we've recently faced in the South East Queensland construction materials business, are going to have a negative impact on our full year earnings compared to FY '19. We've revised our FY '20 forecast EBIT to a range of $12.5 million to $17.5 million. Whilst this revised guidance reflects the significantly reduced cement volumes and includes all of our costs incurred to date on the matter, it doesn't make any allowance for a favorable outcome from the Boral trial. The Board has elected not to declare an interim dividend. So whilst the South East Queensland construction materials sector still faces some challenges, we are fortunate to have the various project opportunities such as the Cross River Rail and the increased activity in the resource sector. The outlook for our New Generation Building Materials business is very positive for a number of reasons, including the establishment of our U.S.A. composite manufacturing facility, allowing us to comply with the made-in-America requirements; the expansion of CFT crossarms sales internationally; leveraging increased sales of pedestrian infrastructure and bridges of our successful entry into the Middle East market; and realizing revenue through our EFC technology on the back of the recent German approval using the variety of commercial models I mentioned. So ladies and gentlemen, that concludes the presentation, and we're happy to take questions.

[Operator Instructions] Your first question today comes from Peter Wilson from Crédit Suisse.

Got a few questions. Firstly, I'm just hoping you could sketch out or give us an idea of the materiality of some of these cost items that have come through the Construction Materials and Services segment, so the legal costs, the increased maintenance costs in transport and also, I guess, some way to think about the loss you're making on the downstream concrete network.

Sure, Peter. So on the legal costs, we're racking up a bill of close to $1 million there. With regards to repairs and maintenance in the -- most of the increase in repairs and maintenance is due to the transport, but there is an offsetting increase in the revenue. You're probably looking at around about $3 million to $3.5 million worth of R&M expense there.

That's in line with what we would expect to see out of that business given the increased activity, Peter.

Okay. And I take them to be full year numbers.

Sorry?

Are they full year number or half year?

For that R&M, that would be a half year increase. We're expecting R&M to be up significantly. And it's just -- it's a fact of the aging fleet, tires. We're starting to see engines -- we're getting up to 1.2 million kilometers on some of these vehicles.

Okay. Because I was a little bit surprised -- I guess, Cam, you said it was in line with expectations, but I guess I was surprised given my impression was that most of those contracts and the fleets were less than 2 years old still.

Yes, that's right. So once the units run at a warranty and start to wear tires, et cetera, you're faced with increased R&M costs, and that's all accounted for in our costing models when we did these jobs. So the costs that we're seeing starting to flow through in that space are not a surprise to us.

But we're still achieving the planned EBIT that we're wanting to achieve on those projects. We're not seeing losses as a result of these maintenance costs. They are built into the overall life of the project. So we are seeing the same EBIT that we are expecting to see.

Okay. And these R&M costs, have they reached somewhat of a steady state for the remainder of the contract? Or should we expect costs to continue to step up?

I think as a percentage of revenue, that will reduce because we have reinvested in some new equipment recently that will reduce that R&M costs as a percentage of revenue. But on a per-unit basis, they'll remain consistent.

Okay. And then South East Queensland concrete, to say competition is high and you've reset some of your price and margin expectations, can you give us an idea of, I guess, your all-in kind of earnings loss you're making on the downstream network currently?

If we look at the Concrete business in isolation, we would have some plants that are in a loss-making position and some that are making us some money. When you consider the pull-through from cement and fly ash, we're still in front on that whole business as a whole. So -- and part of these -- some of these plants have only been in operation for 2 or 3 months, and we're building a market there. So -- but as we -- as Cameron said, we have seen some significant pressures in the market, and there are some lower prices out there. And we're not competing at those lower prices, so our volumes are perhaps not as high as they could be.

So I guess, in summary, we're electing to do lower volumes at the higher-margin work rather than chase the large volumes at the low price.

Okay. And can you give us some more color on, I guess, just to squeeze in that cement business? So on the volume and price side, so you mentioned market volumes are down, but the Boral volumes have restarted end of October. So I'm wondering, have you lost kind of further volumes to import competition, for example? And what's happened to price in the market?

No, the cement -- the pressure that we're seeing is more so in the concrete industry. So we would have liked to have seen more volume in cement sales through concrete sales. However, as for reasons we've mentioned, we've not been as bullish in chasing volume there as we may have been. But I would say cement-wise, no, we're not seeing a major shift in our customer base.

Your next question comes from Kurt Gelsomino from Morgans.

Sorry, can you hear me there?

Yes.

Cameron and Fergus, I was wondering if you could share the outlook for clinker prices in the second half of '20 and then going to FY '21 and also maybe just talk about how you're managing your FX exposure at the moment.

Well, clinker prices, we see stable. We have a contract that we were quite happy with that we've entered into in the last month or so. It did see us shifting suppliers. So we are -- we were, for the last sort of 3 to 4 years, sourcing our clinker out of China. We have changed, and the reason we did that was it was a better commercial deal for us. So we see clinker prices as stable and predictable.

Are you still sourcing out of China, sorry, Cam?

No, we're not sourcing out of China. We're sourcing out of Thailand.

And then just on the FX front, maybe Fergus.

So on the FX side of things, we have some cover in place probably for the next sort of 9 to 12 months at levels that we're comfortable with. Obviously, with the recent dip in it, it's making it harder to get cover looking forward. But at this point in time, going forward, that sort of 9 to 12 months, we're using a multitude of options around sort of FECs, options, tasks and a few things like that to manage our FX exposure, so we're comfortable where we are.

I guess the other thing is we are generating sales in U.S. dollars through our composites business now, which sort of does generate some sort of natural hedge for us in that space.

Yes.

Yes. Okay. And then maybe just about your comment around the court case litigation, I guess, what does a successful outcome look for you guys? Is it sort of just a recovery of the sort of the revenue opportunity foregone? I guess you're not assuming sort of any recovery in cement price, too. Can you talk about that comment?

No, we've not assumed any upside at all as a result of that litigation. And to answer your question, to try and put a number on that, there's a number of options that could be the outcome sort of ranging from 0 to quite a few dollars. But it wouldn't be appropriate for us to be putting a number on that at this point and building it into our numbers. So we've used 0.

That's okay. And then just further on from, I guess, cement pricing, once you sort of resume supply to Boral -- I think we talked about last year how you sort of expected sort of lower prices to flow through the rest of your cement book. Have you seen that since you sort of recommence supply to Boral in late October?

No. I would say since October, the cement price has been stable.

Your next question comes from John Hynd from Wilsons.

I was hoping maybe to change tack a little bit, and if we look at Slide 7 with the Construction Materials and Services numbers you've put forward, Fergus, maybe you can help us understand the change between the $19.3 million last period and the $6.9 million this period? What are the main buckets that we should be allocating the change in numbers too, please?

I don't have that on top of mind, but the big, big one is, obviously, cement. So first half '19, we had full price cement from Boral, plus we had all of Nielsens and everything like that, so that was full tote odds in half '19. Half '20, we've obviously haven't had any Boral volumes until the 22nd of October. We have had -- we still have had Nielsens volumes, and they did open their import terminal, but we have still been supplying some small amounts of cement to them as well. The Concrete business, the start-up of the Concrete business on its own, as you start those plants, we've gone from that first half of '19, I think we only probably had 2, 2.5 that were fully operational. We're now at 6 operational plants, and that start-up phase has driven a loss.

The other significant variance is we had a large concrete project, a wind farm project we were supplying that was consuming our cement, fly ash aggregates and mobile batch plants and trucks on site servicing that large project in the prior period.

Okay. Maybe that's -- I mean is that the big moving part here? Is that -- is it the wind farm project?

Well, that's one of the significant changes, that drop in revenue and EBIT through not having those project opportunities exist through this half. That, obviously, coupled with cement that Fergus has explained.

Yes. Can you ever perhaps talk on the change in volumes? Have you quantified that on the call yet?

No, we haven't.

We haven't. And it's not appropriate for us to call out customer volumes and such. So no, we haven't quantified volumes is the answer, I guess.

Okay. With the new -- or next-gen -- or New Generation, you've talked about round pole opportunity. I'm wondering if you can perhaps help us quantify that opportunity. And also you've talked about U.S. revenue coming through now. And what does this business look like in FY '21 from a revenue point of view, please? Are you getting enough line of sight on contract wins yet?

If we talk to the round pole first, the round pole was developed -- we had quite a lot of customer interest in being able to have a round pole that you could use either as a light pole or even as a power pole. So we can -- we developed a die. We're making it with a thicker wall thickness, and we have put about 30 of them in situ at the Qantas Flight Training Academy so as a light pole. They're obviously hollow, so you can add whatever luminaire and whatever -- everything else you like to it. As a result of that, we've had significant interest from both Essential Energy and Energy Queensland looking at these poles, both for light poles and power poles. So we're currently in the testing phase with those guys now. We've got some laboratory testing in our composites facility in Toowoomba being undertaken to prove the integrity of the pole compared to a timber pole. And the market across Australia alone for poles is significant for us. So that's where we're working towards is the electricity industry. However, we have had some immediate traction in interest in light poles on this product.

If we move -- go ahead, John.

Sorry, Fergus. So can it be -- I mean can it -- at what point does it become as big or half the size of your Crossarm business at the moment?

Well, I think providing the testing meets the customer specification, which we believe it does, that's what we -- our R&D team designed it around. It will become -- the cost per element on a pole is significantly greater than a crossarm. So we think within sort of 12 months, providing we get traction into the market, we can be every bit as big as our Crossarm business there. So it's that product that we've been sort of working on now for a couple of years and obviously didn't invest in the die and the equipment to manufacture it until we were confident that we can actually build a product we could sell.