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] With us today, we have the company's CEO, Cameron Coleman; CFO, Fergus Hume; General Manager, Michael Kemp; Chairman, Denis Wagner; and Company Secretary, Karen Brown. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your first speaker, Cameron Coleman. Thank you. Please go ahead.

Good morning, ladies and gentlemen, and welcome to our half year results presentation. The first half of 2021 has shown a great improvement when compared to last year. Overall revenue for the first half compared with the prior corresponding period is up 27% to $155.8 million. The pro forma EBIT result of $10.3 million is a significant improvement as well. This result has been driven by growth in cement volumes, increased precast activity, increased quarry volumes, the commencement of a major project from our Wacol precast facility and continued strong utilization of our Bulk Haulage assets. Over the past 6 months, we have reduced our gross debt by over $11 million. Overall, the business is in a much better shape than a year ago or even 6 months ago. Most of our businesses are performing well with bright spots being cement, precast, transport and quarries. We had some mixed results from CFT, with strong performance coming from our Crossarms in Australia and custom build in the Middle East. Sales in the U.S.A. remained low and custom build in Australia slowed compared to the prior corresponding period. Our low carbon concrete technology continued to make traction in the U.K. Our contractual differences under a supply agreement with 1 of our large cement customers has also been resolved. I'll now hand over to Fergus to take you through the financial results in more detail.

Thanks, Cameron. Looking at the first half '21 pro forma results. Our revenues have increased by $26.6 million to $155.8 million or 21% compared to the second half of '20 and 27% compared to the prior corresponding period. As Cam pointed out, revenue increased across on almost all business units, in particular, cement, concrete, quarries and transport. EBIT has increased by $3.3 million to $10.3 million or by 46% compared to the second half of '20 and was significantly up on the first half of '20. The EBIT margin also improved by 1.2% from the second half of '20 and 5% from the first half of '20. Now looking at the segment results. Sales in construction materials and services are higher due to increased activity in the quarry, concrete and transport division and the higher cement volumes. The increased sales in concrete reflects the higher volumes being sold as a result of the full commissioning of our active plants and the increase in demand in Southeast Queensland. However, margins continue to come under pressure on fixed plant concrete sales. The increased sales in the quarry area due to the South Back Creek quarry increasing production volumes on the back of 24-hour operations and the Shepton Quarry, which was purchased in June last year. Transport continues to be a strong performer on the back of increased activity in the mining sector. It is pleasing to see the increased activity in these areas, and this has led to a return to higher and consistent EBIT margins. New Generation Building Materials business has seen a decrease of 1.4% in sales, but an increase in EBIT of 69%. In CFT, we have seen the electrical Crossarm distribution supply business grow revenue by over 15%, with growth domestically and internationally. However, we also experienced a downturn in the pedestrian infrastructure and bridge division, impacted by delays due to COVID-19. We continue to invest in R&D and business development in the New Generation Building Materials segment to create new product lines and expand geographically. For example, we have introduced poles into our electrical distribution products. We have spent over $800,000 in our low carbon technology, Earth Friendly Concrete, in the last 6 months, a 58% increase on the spend in the prior corresponding period reflecting the increased research and development and business development spend to grow domestically and internationally, with a major focus on market development in the U.K. The CFT business had an EBIT margin of over 14%, an increase of 6% or a growth of 68% compared to the corresponding prior period. The EBIT for CFT has grown by 43% compared to the prior corresponding period. It should also be noted that we haven't received any JobKeeper support at all. Now to the cash flow. There has been an improvement in working capital due to the timing of debtors with some significant invoices raised at the end of June. As mentioned at our full year results, these debtors were outstanding at the 30th of June and have all been received in this half. The $6.6 million of capital expenditure this half has been spent across the business, with $2.6 million on land for the concrete, quarry and precast businesses; $1.3 million on quarry equipment; and $1.1 million on CFT plant to complement the $5 million spent last year, which significantly increases our capacity and efficiency. This CapEx spend is mainly growth CapEx, not maintenance CapEx. And on to the working capital and net debt. As I mentioned previously, the net working capital has reduced, whilst cash at bank has increased in these 6 months. This has allowed us to repay both equipment finance and term debt. I'll now hand back to Cameron and Michael.

Thanks, Fergus. As reflected in the numbers that Fergus has just presented, it is encouraging to see the improvement in the business. Whilst this improvement is positive, there remains further opportunities for the business to deliver growth, in revenue and profitability. Michael will now update you on the progress of our New Generation Building Materials business.

Thanks, Cam. Starting with our CFT business. For those that aren't familiar with this technology, it is a lightweight, noncorrosive, nonconductive fiberglass material produced here in Toowomba by Wagners and used in electrical distribution networks. It's used in the form of Crossarms, power poles and light poles. We also use it in a range of custom build structures, including pedestrian infrastructure and bridges. Whilst revenue was relatively consistent with the first half of FY '20, continued investment in technology has delivered significantly more efficient manufacturing processes flowing on to improve margins. Our composite business across Australia and New Zealand achieved a 15% increase in Crossarm sales compared to the prior half year. This was offset by stalling the activity in local and state government-funded pedestrian infrastructure and road bridge projects due to delays we attribute to COVID-19. The robotic arm on this slide is part of our new Crossarm manufacturing cell. In addition to this investment in high-tech manufacturing, we have commenced the fabrication of 2 new Pultrusion Machines to expand our capabilities at our Toowomba facility. The investment in this plant and equipment will double our crossarm manufacturing capacity. It will increase our pultrusion capacity by 60% and allow Pultrusion Machines to be dedicated to the manufacturing of poles. Looking now at our international CFT operations. In the U.S., COVID has substantially impacted sales, along with our ability to build and commission a manufacturing facility. At this stage, we are planning to commence the installation of our new pultrusion machine later this year once our technical team can get to the U.S. with the ability to return home safely. So while the U.S. sales were slowed, we experienced strong demand for our composite fiber technology in the Middle East, an excess of $2.6 million worth of CFT product was manufactured and shipped internationally in the first half, demonstrating the demand for this product worldwide. More broadly, our international sales team continue to pursue opportunities that we can manufacture and distribute from our Toowomba facility. Moving on to our lower carbon concrete technology, Earth Friendly Concrete, which has made great progress over the past 6 months. We have significantly increased our spend on the development of our technology in response to increasing international demand. Our technology replaces the cement powder used in traditional concrete. Given the production of cement is responsible for 8% of the world's carbon emissions, Earth Friendly Concrete is now very much on the radar of concrete producers and consumers around the world. In a recent project by Keltbray, a major construction company in the U.K., the successful placement of Earth Friendly Concrete to a large water project in London saved 240 tonnes of carbon emissions alone. When coupled with other projects completed using our technology, in just the last 6 months, we have saved in excess of 850 tonnes in carbon emission. We now have an accelerating take-up of our technology internationally. Our Earth Friendly Concrete is being used in infrastructure projects, undertaken by various construction companies in London through our U.K. distribution partner. In India, we continue to work with our partner, JSW, to obtain the Indian standards approval required for the application of Earth Friendly Concrete into projects. Closer to home, here in Southeast Queensland, customers are beginning to select Earth Friendly Concrete for applications ranging from multistory building complexes to homeowners that value the environmental benefits our technology has to offer. That concludes their commentary on New Generation Building Materials. I'll hand back to Cameron.

So we'll move on to the Construction Materials and Services segment. And as Fergus reported, on a consolidated basis, the first half has realized a 33% increase in revenue compared to the same period in FY '20, and it's achieved a $14.8 million EBIT. We've also seen an increase in our EBIT margin as a result of the revenue coming from sectors that realize a higher margin. I'll start with our quarry business, which has performed well. The fixed quarries have produced solid volumes, including a full 6 months from the Shepton Quarry. You'll see a picture of the crushing plant at the Shepton Quarry on this slide here. When coupled with the increase in activity from the resource sector, this business has made a significant contribution to our performance through this period. On to our cement business, and you'll see at Slide 14, a great photo of the site with the world's first composite geopolymer concrete wharf, showcasing our CFT and EFC technologies. From this facility and our Townsville site, we supply bulk and bagged cement products to the market. Cement has had a strong first half. We've experienced an increase in sales due to our largest customer returning to full contracted volumes. There has also been a general increase in cement volumes with the increased building activity in Southeast Queensland. Moving on to the Concrete business. We've seen increased volumes from our concrete plants as our sites are now fully commissioned, all capable of producing Earth Friendly Concrete as well as traditional concrete. We have also seen a general increase in construction activity in the Southeast Queensland market. Whilst pricing has remained lower than historically achieved, there does appear to be some positive moves on these prices due to increased demand. So the business has continued to be impacted by pressure on concrete pricing than resulting margins. We are seeing early signs of market improvement, and we expect this to continue. We operate a major precast and prestressed concrete projects business at Wacol in Brisbane. In the first half of this financial year, we commenced work on the major infrastructure -- on major infrastructure projects. We expect higher revenue and EBIT contributions from this business in the second half of this year, with further opportunities in the infrastructure sector already identified. Our Bulk Haulage operations provided another solid contribution to our financial performance this half. We have seen a continuation of existing contracts and the start of some new projects. Our customers have increased their outputs, which has meant higher utilization of our assets and increased revenues in this business. The resource sector continues to provide significant opportunities for our Bulk Haulage business as evident from the high level of tendering activity we've seen in recent months. So if we now look at our outlook. In CFT, we look forward to the improved margins generated from our new automated Crossarm manufacturing cell that Michael spoke about. Revenue growth is expected to improve in custom build applications, including the local and state government-funded pedestrian and bridge market across Australia and New Zealand following the COVID-19 restrictions easing. The commissioning of 2 new Pultrusion Machines from our Toowomba facility will allow us to significantly increase capacity to produce poles, positioning us to service a market that is currently searching for an alternative to timber. In the U.S., we have commenced design and construction of our factories, and the commissioning of the pultrusion machine will occur later this calendar year. In the meantime, we will continue to pursue sales opportunities across the U.S. that can be manufactured and distributed from our existing facilities. The Middle East will continue to provide opportunities for composite fiber technology on the back of the successful projects that have been delivered in this region today. Our outlook for Earth Friendly Concrete business focuses on increasing sales through our concrete batch plant network in Southeast Queensland and through our commercial partners in London and Germany. We will continue to support our partner, JSW, in obtaining Indian standards approval and leverage of the Indian government's national action plan on climate change. Given the success of our Earth Friendly Concrete technology in the U.K., we are seeking potential partners that are dedicated to accelerating the use of green technologies. Our technology makes a positive impact on carbon emissions in the construction industry. We're excited about the global demand for green technology such as ours. On to the outlook for construction materials and services. We look forward to securing infrastructure and resource projects, adding an increased contribution across the group. We expect continued growth in our Bulk Haulage operations. We anticipate the growth in cement sales that have proven to be consistent throughout the year to remain. We expect our concrete business will improve with increased demand in Southeast Queensland, and we anticipate an improvement in selling price. We expect further growth in our quarry business with a full year contribution from the Shepton Quarry, along with the benefit of contracts secured in our contract crushing and services business. So in conclusion, we are encouraged by the first half result following a tough year in FY '20. We have a positive outlook going forward within Australia and internationally, with already secured work and a large number of opportunities identified and being pursued. Throughout this period, we've also resolved some disruptions that affected the business, allowing us to now focus solely on operations and growth. There are still many opportunities for this business, and we'll continue to strive for further profitable growth in all areas. We remain committed to our growth strategy, as outlined in our full year presentation: to achieve planned future growth through innovation and investment in developing new technologies, new product lines and production efficiencies across all of our business; continued integration of our various business units and international operations with a particular focus on establishing new markets for our composite fiber technology and low-carbon concrete technology, Earth Friendly Concrete. Clearly, with the state of the world, execution of major projects and capacity to accelerate projects has been impacted. Once global lockdowns and restrictions ease, we will resume the pursuit of opportunities for major offshore projects. That concludes our presentation this morning. And as mentioned, I'm joined here today with Fergus Hume, Michael Kemp, Karen Brown and Dennis Wagner, and we're all happy to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Raju Ahmed from CCZ Equities.

Look, I've got a couple of questions. Can I start with the outlook statement? Have I -- is it fair to assume that you're expecting better revenue in second half of FY '21 versus the first half and also better margins, given the disruptions you've experienced in the first half? What's the view there, Cameron?

Yes. Raju, we expect the revenue growth that's occurred over the past 6 months to continue on through the second half. We sort of ramped up -- we started really ramping up revenue due to the opportunities that were presenting themselves. And just as we commenced some of these larger project work, revenue started to increase well into the back half of the first half, and we expect that solid performance through the second half. And as we pointed out in the presentation, that type of work does drive those higher margins.

Okay. Okay. So let's take it -- you've got -- I think you're referring to the Cross River tunnel precast project there. But if you set that aside, when you look at the balance of the business, I assume there was a reasonable level of COVID-related disruptions. As they ease out in the context of Australia, would there be an underlying margin lift in the business?

In the -- well, Raju, there's been a number of project opportunities that across the business that we historically see. So if you look at the COVID-related challenges that we referred to and that you just touched on, they mainly impacted our custom build side of the business, where we deliver pedestrian infrastructure and road bridges around Australia and into international markets. So we do see more activity now in that area of our business as those border closures have eased or lifted, and we can now get our products to market easier and get our salespeople to different sites to explain to asset owners, what benefit our products bring to their project.

Okay. That's helpful. So just touching on CFT. I note your comment about the hit from COVID on the pedestrian and road bridge infrastructure projects. Can I assume that it's not so much that if there is demand there, it's more now a question of timing. So then following on from that assumption, could there be a scenario where you've got a short-term hump in demand and an upfront hump before things start to normalize into your standard growth rate of around 15% to 20% a year? Is that dependent on the capacity on the build?

Raju, Michael Kemp here. With the composite business, particularly in custom build, the level of quoting work has continued to be quite high. What we've seen is that the amount of orders actually placed has been quite low. So there's still heats of work out there that we've quoted that's in the pipeline, and it's about, sort of, seeing it come to fruition. We have a feeling that as end of the financial year approaches, a lot of that's going to have to be accelerated. And so we're seeing -- we are preparing now to be able to meet that increased demand.

Okay. Okay. Just one more quick one on CFT. As you sort of look to install the U.S. facility and pultrusion line later this calendar year, I presume your -- the price that you sent in the past and I suppose over the last 2, 3 years, they've obviously factored in shipping costs and freight charges and whatnot. Those would be, I presume, cycled out once you've got a local operation. Does that mean U.S. operations could potentially operate at a higher margin than your Australian operations? Or am I sort of mixing things up here?

No. I think you got it right. So we are -- we're currently sending product to America. We are paying freight. And so operating locally, just being a local, will give us more opportunities. But also, obviously, our freight costs will drop, and we will see higher margin out of manufacturing in the U.S.

Okay. And look, the very last thing. There's talks about -- the press talks about the quarantine facility next to Toowomba Airport. Anything you can update us on that front? Is it -- if it happens, is it likely to be an FY '21 story?

Raju, Denis Wagner here. The quarantine facility is a proposal from the family company that's associated with the Wellcamp airport through the Queensland government. So we've put a proposal to the government that we would build a facility, and they will operate. From Wagners perspective, though, the revenue generation, there will be some revenue generation in concrete and quarry materials for the construction of the site. It will be FY '21, so if this happens, and it's a government decision as to whether it proceeds or not. If it happens, it will happen before and be completed before the end of June. So there may be some revenue, but it won't be overly significant in the overall scheme of the business.

Your next question comes from the line of Kurt Gelsomino from Morgans.

I've also got a few questions. But firstly, just on Cross River Rail, can I just confirm, did you generate any revenue in that project in the first half of FY '21?

Yes. Yes, we did, Kurt. Yes. It's -- the site's sort of into full production. So there's quite a bit of revenue from that site. Production started in September, and we've been ramping up to get to full rates probably by the end of December. You can see the photo on the front of the presentation with all the tunnel segments in the yard. So we will see a better contribution in the second half because we'll be at full production for 6 months as opposed to 3 months of production.

Understood. And how sort of have been the margins on the production of those tunnel segments to date? I guess how they sort of met your expectations?

Yes. They have -- Kurt, production targets are being met, the jobs flowing along as we expected to, so...

And then sort of on that sort of $40 million contract, how much do you think you'll sort of receive in FY '21?

I'd say, 75%, 80%, something like that, depending on how our client goes in the installation of the elements into the tunnel under the river, which is just...

And so you might have only received 15% or so in that first half? 15%, that is.

It would be more than that, I would suggest.

That's okay. I'll take the offline maybe. Then just on the Carmichael contract, what are sort of your second half '21 volume expectations relative to the first half '21? Do you think volumes into that contract are sort of stable or higher or lower, just broadly speaking?

They'll be stable there, Kurt. We don't see any real change to volumes on that project.

Yes. That's great. And then just some of the other, I guess, infrastructure opportunities more in the core Construction Materials business, how has sort of tender activity been? And do you have sort of any line of sight or greater visibility? And when you think tender awards will start to flow for that business?

Well, tendering activity is strong. There's plenty going on out there, and we're winning our share of work, sort of, every week. So there's plenty of opportunity, plenty of opportunity. We're winning our share of it. And we see that this sector providing plenty more opportunities into the future. We sort of see it's a good spot to be in the construction materials sector with plenty of activity happening in Southeast Queensland. Then the resource sector is providing equal opportunities. Actually, we're seeing a lot of projects expanding, a lot of customers wanting to increase volumes. So once you're in there and performing contracts, the upside is quite significant when they start ramping up their export volumes.

Understood. And then some of those major concrete projects, I think, in the wind farm space with, I think you've touched on in the past. How sort of those tenders progressing? Do you sort of expect anything to be awarded in the second half of '21?

We do hope there could be a couple left in the second half of '21. However, I don't see that they would make any real contribution in this half. Contributions from those projects would flow later this calendar year.

Yes. So that will help sort of build out the pipeline of work for the business into FY '22, if you're successful on that tunnel.

Yes. Exactly, yes. The reality of it is there will be very little revenue generated from those projects before June. It's more into the next year.

And sort of Inland Rail, that opportunity there, when do you sort of think progress will be made on tenders and award of work for some of the opportunities you're targeting on that project?

We're in discussion now on material pricing, albeit a little further away than the sort of local area here in Southeast Queensland. We do see -- we do expect revenue to start to -- or all opportunities to start to be let in that area throughout the first half -- sorry, throughout the second half next year. So it's 12 months away, at least.

And just one final one for me, sorry. Those comments you made, sorry, about the -- your plan to sort of seek third-party capital for EFC. I guess that was a bit of new information today. Could you provide maybe a little bit more color on that front in terms of how much of the business would you be willing to sell? And sort of how advanced are these discussions with third parties to invest in your EFC business?

Yes, can be Kurt. What's happened there is we've been getting quite a bit of traction for the product, particularly in Europe. And as we've formed relationships with various companies over there, we've had a number of approaches to get a slice of the pie, effectively, people who want to get on board and be part of our EFC growth internationally. So we're carefully considering what the best options are for that business and what the best channel to market is. A lot of the people that have -- we've been in discussions with, don't only sort of offer the investment or the assistance we need to really ramp up the growth of the business over there. They also offer that critical channel to market. So we're actually looking at a number of different models for our Earth Friendly Concrete business at the moment. And one of those is to bring on a partner that provides the access to -- access to the market and also that desire to really be part of a green technology that solves carbon emission issues.

So would you be [indiscernible] filling partnership in a sort of more of a 50-50 then share of the business going forward? Or...

We don't know, Kurt, but I wouldn't say 50-50. We would want to maintain more of the business than that, if we were to do anything, if we went down that path.

Awesome. That's helpful. [Technical Difficulty]

[Technical Difficulty] comments, yes, it's really about the future and the technology development. So we have basically a pilot level product at the moment that's getting great traction. Now we'll do something like 10,000, 11,000 cubic meters of concrete into London this financial year. The opportunity then to grow that and to continue development and get that product right for all grades of concrete, all applications is the vision. And that's where we're trying to get it and while we're looking at -- working with partners.

Moving on to our next question, and it comes from the line of Peter Wilson from Crédit Suisse.

Can I just follow that one up on EFC. The type of partner that you would be looking for, is this -- are we talking kind of integrated cement and concrete companies or construction companies?

It could be that. But more of a green technology type investor that's got the desire to see this technology pushed ahead. It's probably not really an existing cement manufacturer, that's a potential partner for us. It's more of a organization that's just totally committed to that green technology that provides solutions to the world's carbon emission issues.

Okay. So that would give you some kind of investment, some help on the technology side, but not necessarily is in distribution of the product?

Yes. We see -- the system we have can be added to any batch plant around the world. So it's reasonably straightforward process to put the equipment that you require to batch EFC on an already existing batch plant. So we need to create the demand for -- the consumers need to create to demand the product, and then we'll have batch plant companies wanting to adopt our technology to meet the market requirements.

Okay. And a question, I guess, for Michael, on that. I mean it does seem like green concrete's time has come, particularly like in Europe, in the U.K. When you look at Earth Friendly Concrete, how do you think it's measuring up to some of the other solutions over there, some of the other cement products?

We believe that we are well ahead. If you look at the traction in the market that we've been able to obtain, so as I said before, something like 11,000 cubic meters, made in batch plants in London and put into footings and into projects such as HS2, the train line from London to Birmingham, the biggest construction project in Europe. So we've got concrete onto that. There's a real push certainly in London, where our focus has been for the -- for green materials. We're seeing it at all levels. We're seeing it from top levels of government over there, and it is filtering down through into the guys that are selecting materials to be used on projects. And as -- your question as to competitors, we've had other -- or with the companies that we're using -- let's put this way, the companies that we are -- that are buying the activator from us and supplying it from the concrete to market have previously used our competitors and dropped them to use us.