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

Good day, and thank you for standing by. Welcome to Wagners Half Year Results 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cameron Coleman, Managing Director of Wagners.

Well, good morning, everyone, and welcome to our results release. I'm joined here today by Fergus Hume, our CFO. And we'll take you through a summary of the first half results and then the outlook for the full year. We're then happy to take any questions at the end of the presentation. I'll start by making it extremely clear that we are dissatisfied with the result for this half. It's been a challenging period. And I want to assure investors that the Board and the management team are currently examining the situation and are making a number of urgent and substantial changes to the business. The group's revenue for the first half of $220 million was in line with our expectations and is a 28% increase on the first half of financial year '22. The result was driven by increases in revenue across both the Construction Materials and Services business and the Composites business. Strong volumes were experienced in cement and steel, together with increased levels of activity in our bulk haulage business and also a reasonable contribution from our mobile concrete business. Our Australia and New Zealand CFT business also had an increase in sales, particularly in the pedestrian infrastructure sector. Despite this, the group EBIT result was well below our expectations at $4.2 million, which was down on the prior corresponding period. This result was impacted by a number of factors. Difficult market conditions in our Southeast Queensland concrete business, delays in commissioning, the automated processing equipment in our crossarm area of the Composites business, which that is now finished and will deliver improved production efficiencies during this period. We also had lower sales than anticipated in our U.S. CFT business, along with an inability to fully utilize the benefits of the Cresson site which will offer manufacturing and efficiencies of our Composites projects as we ramp that up this half. There was a reduction in margins across the business with costs remaining high. Our Construction Materials and Services business was also impacted by wet weather during the period. Increased expenditure in EFC impacted the results, particularly in the U.K. as operations continue to scale up with no corresponding increase in sales. Before I hand over to Fergus to take you through the financial performance of the group in more detail, I thought I'd touch on some of the key points from the first half. If we look at the Construction Materials and Services area first, revenue increased to $191 million. Cement sales were strong with a 26% increase on the prior corresponding period. Our precast business commenced the production of tunnel segments for the Sydney Metro Tunnel project. While the commencement was slightly delayed and the ramp-up has been slower than we'd anticipated, the facility is now in full production. Steel volumes again increased during the half with a good contribution from our new facility in Brisbane, which also commissioned additional automated processing equipment, which will deliver significant production efficiencies in the second half. New bulk haulage projects were secured and commenced during the period, which also required an expansion of our fleet. Driver and truck shortages have been a challenge for the business to manage over the period, which has had an impact on the overall performance. We started to see some improvement in selling prices in our Southeast Queensland concrete operations over the first half, which should lead to an improvement in margins for the second half. Unfortunately, volumes weren't where we had hoped and margins were impacted by increased costs and wet weather. Compared to the first half of last year, the result was impacted by a reduction in margins in the cement business due to higher input costs, driver shortages, late delivery of new haulage equipment and higher-than-budgeted repair and maintenance costs across our bulk haulage operations and a decreased demand for higher-margin products from our North Queensland quarry operations. The overall CFT business delivered sales exceeding $28 million, which is a 54% increase on the prior period. Unfortunately, this increase in revenue did not result in any improvement in EBIT with a loss of $1.8 million for the first half. In our Australian and New Zealand CFT business, there was improvement in sales on the prior corresponding period, both in crossarm and in custom build. We also delivered our first power poles during the period, which we hope to see increased demand moving forward. Unfortunately the crossarm financial performance was well below our expectations despite the sales being strong. The performance was impacted by increased costs associated with the delays in commissioning the automated manufacturing line. Margins were also impacted on a number of projects secured in the period at a low-margin fixed price and an inability to pass on increased material costs. These projects have now been completed. Our U.S. business is now well and truly established. And there were a number of additions to the team during the first half. Sales in the U.S. were below forecast. However, there was considerable efforts and investment in the business development activities over the period, which made for a positive forward order book for our business. We increased expenditure in EFC over the period, particularly in the U.K. Given the level of activity our EFC business is experiencing in the U.K. and Germany, we made the decision to deploy some of our Australian resources to this region. Our focus is to continue to work with the customer base that has made commitments to adopting our technology and to deliver value out of the investments already made in the region. We are currently working with a number of customers to modify their operations to enable Earth Friendly Concrete to replace traditional portal cement in their production process. With the significant investment made in this business to date, it is crucial that it starts to deliver sales and improved performance. To date, this has not been assisted by COVID-19 and general global conditions, particularly as we are not seeing the commitment from governments globally that we had hoped to support our technology. As we've previously advised, we were unsuccessful in securing external investment in the EFC business. Given this, we are currently undertaking a strategic review of the business. EFC remains a watch point for the group. I'll now hand over to Fergus to take you through the financials in a bit more detail.

Thanks, Cam. Our revenues have increased to $220 million, so increases of 28% compared to the first half of '22 and 32% compared to the second half of '22. The revenue compared to the prior corresponding period increased in cement, precast, steel, concrete projects, bulk haulage and CFT. The operating gross profit margin reduction of 4% compared to the prior corresponding period is mainly due to the increased input costs during the half relating to raw materials, shipping and fuel that were unable to be passed on to customers and lower contributions from some project work in the mobile concrete and precast areas of their business due to start-up and establishment costs. The operating EBIT decreased by 6.1% compared to the first half of '22 due to the increased operating costs, reflecting an increase in employee numbers to fulfill major projects, wage increases in line with CPI, increased fuel costs, higher repairs and maintenance costs and higher depreciation due to the investments in transport inquiries. We have continued to invest in our international expansion in CFT and EFC, with the latter having an increased spend in this year of $0.4 million compared to the prior corresponding period, reflecting the increased activity in U.K. and Europe. CFT in U.S.A. had increased costs due to the commencement of manufacturing in country. Moving to the cash flow and debt. The main story on our cash flow is that our lower-than-expected earnings have led to higher borrowings to fund capital expenditure. That was committed to in some cases over 12 months ago. The cash flow from operations has improved in the first half of '23. We slightly reduced our working capital with a reduction in inventory of close to $6 million, offset by increases in receivables. We also increased our capital expenditure to improve production capacity and deliver operational efficiencies. In terms of the capital expenditure, nearly over $5.5 million was spent on the bulk haulage business, mainly on replacement combinations. Most of these were ordered more than 18 months ago. Over $4 million in production efficiencies and improvements in the Wellcamp and [indiscernible] inquiries, $1.3 million spent on turning up the manufacturing capacity, our business steel facility, $2.2 million spent in CFT with 50-50 split between Australia and the U.S. and $1 million spent on EFC with the majority of that in the construction of the manufacturing facility in the U.K. The level of capital expenditure in the past will not be considered going forward and will be reduced in the future. Our company is compliant with all banking covenants and is forecast to remain so. And we have sufficient headroom in our debt facilities in the future. I'll pass it back to Cameron now to take you through our outlook.

Thanks, Fergus. So we are expecting a stronger second half, both in terms of revenue and EBIT. In the Construction Materials and Services business, activity in this sector is expected to remain high, particularly on the back of the recent announcement by the federal and state governments on the committed $7 billion in funding for the 2032 Olympic Games in Brisbane. Given this, cement volumes are expected to remain strong. And we are hoping to see improvement in concrete volumes with the plant network now more mature and truck availability and utilization improving. We also implemented price increases on the 1st of January, which has already had a positive impact on the average sale price. With strict pricing policies now implemented, we do expect selling prices to continue to move in the second half, delivering even improved margins. The precast business is expected to deliver improved results with the large precast tunnel segment project now in full production with deliveries commencing into Sydney. The investment in the new hauling equipment, both during the first half and in the coming months will deliver improved margins in our bulk haulage operations with the new fleet improving productivity on projects and replacing subcontracted equipment and labor. Our long-term contracts in this business provide a secure revenue base for these operations with a number of new projects commencing late in the first half, expected to make a good contribution in the second half. Subject to weather conditions, our current mobile concrete projects underway are expected to deliver improved performance on the first half as we will realize the full 6 months contribution this period. Generally, across the CMS business, margins are expected to improve with disciplined pricing policies and cost reduction measures in place. Looking at the second half of our Composites business. In Australia and New Zealand, we are expecting improved margins in crossarms with the commissioning of the automated manufacturing line now completed. While it is disappointing that the commissioning of this line took longer and cost more than we had anticipated. It's now going to provide improved capacity and efficiencies at our first-class composite facility at Wellcamp. Crossarm sales are expected to be consistent with the first half with volumes contracted with a number of key customers. Following the delivery of over 8,000 crossarms into New Zealand in the first half, we're expecting continued demand for our crossarms from that region. In custom build, which is our pedestrian and infrastructure projects business, we have secured a pipeline of projects for the balance of FY '23 with improved pricing. The focus needs to be on the efficient execution of these projects to ensure their delivery at the tended margins, which are much healthier margins than those experienced in the first half. Following our first delivery of power poles during the first half, we are expecting an increase in demand for this product and other new product lines, particularly light poles, marine poles from both existing and new customers. In the U.S., with the completion of our U.S. facility, margins are expected to improve as all manufacturing and fabrication can now be completed on site. Sales are also expected to improve following the business development activities over the last half and an increasing level of interest and inquiry for composite products in U.S. local markets. While it did not deliver any results during the first half, we will continue to invest in business development activities in the Middle East and other international markets in an effort to deliver additional sales and value in our Composites business. So in summary, we are totally dissatisfied with the results for the first half. And I can assure you that the Board and management team are undertaking an urgent forensic analysis of the issues facing us. This will require some substantial changes both immediately and in the long term to ensure that the business is structured and positioned appropriately to improve performance across the group. With a number of these changes already in place and the secured pipeline of work we have, we are confident on delivering improved performance for the second half. We confirm our previous guidance for the full year, expecting to deliver a full year EBIT result of $14 million to $16 million. On the back a stronger performance in the second half, improved results are also expected in FY '24 compared to that of FY '23. So that concludes the formal part of our presentation. And Fergus and I are happy to address any questions you may have. Thank you.

[Operator Instructions] Our first question comes from the line of Liam Schofield with Morgans Financial.

Just a quick question on concrete margins. I think last half or first half, should I say FY '22 result, you talked about pushing through price increases and sort of getting revenue escalations ahead of costs. That clearly probably didn't happen through this half. As you sit now in January, have you got revenue running above cost?

Liam, the price rises that were implemented on the 1st of January were another circa 15% increase, which was required and will get us into the territory where our revenue will certainly be in line with and if not, slightly ahead of costs.

And then just on CFT, while I've got you, can you perhaps just split out again is that the division between, I suppose, U.S. and Australia, to the extent that you could say U.S. was a drag of x million dollars and Australia saw a margin decline. Can you sort of talk to those dynamics in CFT between the U.S. and Australia?

I guess in the first half -- in the first half, the U.S. was a drag to the tag of just under $1 million. So that probably gives you a feel for where we sit in the Australian business, just washing through those low-margin projects. And in the Australia and New Zealand business is now operating on very healthy margins going forward operation? And we expect the U.S. business will still have some financial impact as it ramps up and grows. But if we look at our pipeline that we've established in the U.S. and the sales that we're executing today, we're fully committed to it and are running as hard as we can there to secure the sales and grow the business to a revenue potentially much bigger than that that we achieved here in Australia.

So as an overarching theme, costs have run well ahead of revenue growth across the business. How are you seeing cost growth and inflation running through the business in the second half so far?

Liam, yes, we've seen most of the increases that we saw were really happened in the first half and were flowing from the second half of last year. We probably saw some big increases, especially across salaries and wages with the CPI increases. So a lot of our EBAs and things are tied into CPI. So they all happened in the first half. In terms of actual other costs, we're probably starting to see in some of our larger, so imports and things like that, we've started to see some of the shipping costs come off, which has taken a little bit of pressure, but we still got the inventory there, obviously. So we're probably seeing the worst of the inflation, I say that with a degree of trepidation there because you don't -- you just don't know what's going to happen. But in terms of our big ticket items that we've seen costs on, we've probably seen the worst of it. If we look at fuel, repairs and maintenance and shipping and those sorts of things, they have started to moderate and passed from off a bit.

[Operator Instructions] I'm showing no further questions in queue at this time. Sorry. We have a question from the line of Peter Wilson with Credit Suisse.

I might just follow-up the question on pricing of concrete in the Southeast Queensland market. I guess could you just give us a bit of a comment on the competitive landscape there? Because it seems in, I guess, in Southeast Queensland, the industry has had a hard time passing through prices and protecting margins where in some other geographies of Australia, it hasn't been that tough. So how do you see that competitive market? Why do you think the industry has not been out to pass through those costs?

Peter, there's a number of theories out there as to why it's been difficult to get concrete prices up. I don't really want to -- they're all series and I don't want to dig into that. But the reality of it is there seems to be some stability in the cement industry now. And certainly, our business, which I can talk about, is not prepared to continue to sell concrete at negative margins. And we are working very, very hard with very strict pricing policy at every site to ensure that we get that average sell price up. And we've seen over the past 12 months now, almost $35 to $40 increase in price per cubic meter of concrete. And that's at the 1st of January that we got to that number. And as prices increase or inputs change in our business, we will be passing it on and not absorbing any of that into the future. And we are seeing the market; the market seems to be having the same view as our business. We're certainly not losing customers. And as we put prices up, they obviously go and check in the market that they're not finding a better deal. So we have some degree of confidence that the market is moving with the cost inputs that are coming into the business. And that's certainly what we're doing in our business.

And given that stricter approach to pricing, I mean, depending what others do, it may well have some impact on volumes. So just thinking about volumes in your fixed concrete network, I mean, it's been, I guess, 4 or 5 years now where that network has been established and I guess it never really met your volume expectations. So it sounds from the call today that you're reviewing a lot of the businesses across Wagners. How do you feel about the viability of that concrete network and your ability to actually get some targeted volumes through that?

Peter, I think given the recent success in price changing, sell price changing and even at our current volumes, we'll be satisfied with the performance of that business. We have to say we are reviewing every business. And that's not excluding the concrete business. But I would say the volumes that we've got forecast coming out of that business in the immediate future, coupled with the price that we now achieve at the revenue line, I think we're on a reasonable path with the concrete business. Now would that will be a major watch point for us, and we'll continue to monitor those key metrics every month.

And composite fiber, so a 54% increase in sales. I mean, that's quite an impressive number. Can you give us a breakdown of how much of that increase was U.S.? How much was crossarms and power poles and how much was these custom build projects?

Yes. So crossarms were pretty flat on the prior period. There was a slight increase in crossarms. The bulk of it is out of the Australia, New Zealand pedestrian infrastructure business. Power poles probably spoke to maybe 10% as we ramped it up, there's a contribution for those. But the bulk of that increase in sales, I just say, is quite an impressive growth. And it's all pretty much attributed to the pedestrian infrastructure market and that revenue both Australia and New Zealand.

Should we expect you to maintain that level of revenue in the custom pedestrian. I guess just reflecting on some of these projects were, I guess, priced pretty sharply relative to inflation. Are you kind of going to pull back from that segment or should we expect revenues to be steady or even grow from there?

We're expecting them to at least be -- at least maintain stable revenue with much healthier EBIT. However, as the sales team get this product into the market and then comes a desire from consumers to own assets such as this that last a lot a lot longer than competing products such as timber or steel, we see growth in sales as well. However, our main focus is to maintain the sales at the level we're at on much better margins. That's the key focus for our composites business today in Australia and New Zealand.

We have the capacity to do more, Peter. But where we are at the moment, it's around improving the margins on the work that we can do. And like what we've got, one, it appears to be at similar revenues that have better sort of efficiencies in production and making sure that we've included the cost increases. In the U.S., the U.S. revenue compared to first half of last year, it more than doubled. So we were happy that it's increased, but we weren't happy. We were hoping that it would be bigger. But we expect that to continue to grow. And the U.S. has the potential for quite large growth because it's going from such a low base.

So Peter, in summary, we're very disappointed with the concrete business in the first half. However, we're quite optimistic that the changes we've made, particularly to the revenue line will make a valuable contribution in the second half. And we're also unhappy with the margins we're getting out of the increased sales in composites. However, we feel that that has been corrected through the projects we had coming on in the second half being at price to include those input costs that Fergus just referred to.

And one last one, just on the precast project, I guess, Sydney Metro, which has started up and you're saying you're making deliveries now. Should we expect pretty healthy margins on that project still? Or is there something else to consider?

No. Look, we've got the risk with that precast job was being able to achieve the production rate out of the Carousel, the automated lines at our Wellcamp facility. And we have proven that, and we're exceeding our targets. So we're expecting the margins to be as we forecast them in our original budget for that job.

This half that we're reporting on now didn't achieve the margins because it was ramping up. So to give you a feel for, we've probably averaged around 40 segments a ship and we're now averaging over 80 segments a ship year with the same number of people. So we're getting much better efficiencies out of the plant that -- which is driving better margins.

That concludes today's question-and-answer session. I'd like to turn the call back to Cameron Coleman for closing remarks.

Well, that wraps up the presentation. I'd just like to say thank you to all investors that have dialed in. And I assure you that we're working hard on this business. And yes, thank you for your time today. Goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.