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

Good morning, everyone, and welcome to Wagners Full Year FY '24 Results Webinar. My name is Sam Wells from NWR. And joining me from the company today is Managing Director, Cameron Coleman; and Chief Financial Officer, Fergus Hume. Following a brief summary of the updated release of results to the ASX yesterday afternoon, we will have some time for Q&A of the management team. [Operator Instructions] Thank you, and over to you, Cameron.

Good morning, ladies and gentlemen, and thanks, Sam. It's great to have you with us here today to present our FY '24 results. We've delivered a result with significant improvement on FY '23 and well ahead of the previous guidance issued to the market. The demand for construction materials and services was strong throughout the year and market conditions remain stable. This delivered an overall group revenue of $481 million, which is a slight increase on the prior year. There was a significant improvement in our EBIT result coming in at $40 million compared to $17 million for the prior year. This represents an 81% EBIT growth year-on-year. As a result of this year's performance, the Board has declared a dividend of $0.025 per share. The notable highlights for the year that contributed to this result were the overall strong demand for construction materials and services and improvement in gross margins driven by improved market conditions and a focus on cost control, increasing volumes from our concrete business with record meters of concrete supplied from our plants in June. The significant contribution from a large precast concrete tunnel project, which was completed in April and improved margins across our Composite Fiber Technologies business in Australia and New Zealand. The EBIT result was, however, impacted by losses in our CFT USA business, which were greater than that of FY '23. Operating costs also increased during the year primarily in repairs and maintenance in our bulk haulage operations, along with increased labor costs. You'll notice a slight change to our presentation and how we've reported our results this year. To provide a better understanding of our business, we've changed the way in which we report our Construction Materials and Services business. We've broken this segment into 2 areas: Firstly, Construction Materials, which is our cement concrete aggregates and reinforcing steel businesses based here in Southeast Queensland. And secondly, our project businesses, which include bulk haulage, precast, contract crushing and mobile concrete services, all of which are contracting type businesses that are subject to more significant variability in revenue. So with that reporting framework in mind, I'll take you through our Southeast Queensland-based Construction Materials segment. The business delivered improved results on last year. revenue in this area was $216 million compared to $208 million in the prior year. More pleasing was the improvement in EBIT margin, coming in at 14.7% compared to FY '23, which was only 9.1%. This resulted in an EBIT result of $31.7 million for the Construction Materials business. In cement, we experienced improved market conditions. While revenue was only up 6% on the prior year, our margins improved as the year progressed with a focus on cost reductions, delivering over 50% growth in EBIT on the prior year. As we highlighted at our half year results, the Concrete business has continued to be challenging. However, we are starting to see improvement. While concrete volumes were fairly consistent with the prior year, we did see a steady increase in volumes in the fourth quarter with record volumes across our plant network delivered in June. Together with stable market conditions and a significant improvement in revenue per meter compared to the prior year, by the end of Q4, the business was making a positive contribution to the overall group result. We expect continued improvement this year. During the period, we demonstrated our commitment to our strategy of expanding the Southeast Queensland concrete plant network, securing the critical path to market for our cement and aggregate products. This week, we've opened an additional concrete plant. We've commenced the detailed design for development of another along with securing an additional 2 sites during the year, which are in the initial development approval stages. In our quarries the, business's $16 million plant upgrade at our Wellcamp quarry was completed in Q4. This investment allows us to significantly increase the product range to our customers resulting in increased sales volumes, along with servicing more of our internal concrete plants, as this plant has far greater capacity along with much lower production costs. If we now turn to the Project Services segment, consisting of our contracting type businesses, both the revenue and EBIT results were generally consistent with FY '23. We with revenue of $206 million and an EBIT result of $18.5 million. The precast and bulk haulage businesses were the main drivers behind this result. With the precast business completing the supply of just over 70,000 tunnel segments for the Sydney Metro project during the year. These elements were manufactured at our Wacol facility. Given we haven't been able to secure a replacement project in precast of this magnitude, we have made the decision to terminate the lease at Wacol early. We intend to relocate the business to a new company-owned site with a purpose-built facility, eliminating the high lease costs we're currently subject to. This decision has resulted in a $3.2 million impairment, reflecting end of lease and make good cost requirements. This is a reduction on the previously communicated impairment of $4.5 million given we now have greater certainty around our exit costs. In FY '24, our bulk haulage business serviced 10 projects throughout Queensland and the Northern Territory, utilizing 60 company-owned prime movers and 180 trailers. Revenue was up 10% on the prior year. In concrete projects, we were only engaged on one wind farm project during the year which has also had a lengthy period of work being suspended. While we resumed operations on site, there was only a relatively small contribution to the result from this project. Now moving on to CFT. Overall, while sales were relatively consistent year-on-year, collectively, the segment delivered an improved EBIT result of $400,000. The Australia/New Zealand business delivered growth in both revenue and earnings. Crossarms volumes improved on FY '23 and the efficiencies generated from the investment made in automated processing delivered improved margin across arm production. Demand for light and utility poles continued to increase during the year, and the business secured 2 new long-term contracts late in Q4 for the supply of CFT utility poles through our New South Wales and Queensland. This positions the business well moving forward. In custom-build or the pedestrian infrastructure area of the business, we delivered a number of large projects and improved margins compared to FY '23. Despite this, the overall result was negatively impacted by 1 project in New Zealand, which delivered a material loss. So while overall, the Australia/New Zealand business delivered a significantly improved EBIT of $4.6 million. This result could have been much greater if we had executed the New Zealand project appropriately. The losses associated with that project were realized in FY '24 and will not impact this year's results. In the U.S., losses narrowed in second half compared to the first half of '24. However, with the continued investment through the year, the overall loss of $4.2 million was greater in FY '24 compared to FY '23. We remain committed to this business and the opportunities that it presents. Now before I speak to the strategic priorities and our outlook, I'll hand you over to Fergus to run through the balance sheet and the cash flow.

Thanks, Cameron. Looking at the total group performance with an NPAT of $10.3 million, which is up 229% compared to last year, the main points to note are the improved gross margins of 29.2%, up 4% on the prior year, and this has flowed through to the operating EBIT margin of 8.2%, which has increased by 3.6% on financial year '23. We have also recognized an impairment on the Wacol side, following the decision to vacate the site, along with the EFC impairment advised in the first half of this year. . Moving to the segment results. As Karen has explained, we've changed our previous CMS segment to now be 2 segments, Construction Materials and Project Services. We believe this gives better insights into the performance of the business. The Construction Materials segment shows consistent growth in the EBIT margins across the last 4 half years. FY '24 margin for the whole year is 14.7%, up 5.5% on last year but the second half FY '24 margin is 16.4%. The Project Services segment shows consistent revenues year-on-year, but the second half of FY '24 has decreased due to the completion of the Sydney Metro precast project. The FY '24 EBIT margin was 10.5%, normalizing for the Wacol impairment. If you look at the CFT segment now. So this business, excluding the U.S.A. operations, had revenue growth of 6% to $57.2 million in FY '24. EBIT grew to $4.6 million compared to $0.5 million with margins at 8%. The second half FY '24 was impacted by an unfavorable custom-build project in New Zealand. If this was excluded from the second half, the margins would have been 14.7% in FY '24, a significant increase on the 1% margin in FY '23. The overall CFT result has been impacted by the losses incurred in the CFT USA business. Looking at the FY '24 balance sheet, that's showing an improvement in the working capital of close to $25 million. With reductions in receivables and inventories, trade and other payables has also declined. Net debt has decreased by $45.8 million with a $38.5 million reduction in gross debt. This is as a result of the increased cash conversion due to the improved operating results and the release of working capital. The FY '24 cash flow shows a $55.8 million improvement in cash flow from operations in FY '24. This is primarily due to stronger earnings and the working capital reduction. The FY '24 capital expenditure was $8.7 million higher than FY '23, and this is partially offset by some increased proceeds from sale of assets. The capital expenditure was a mix of growth and replacement spend. The growth spend was primarily on quarry plants, concrete plants and efficiency upgrades and new product profiles in CFT Australia. And the replacement spend was on trucks, mobile equipment and light vehicles. I'll now pass it back to Karen and her to take you through the strategy update and outlook. .

All right. Thanks, Fergus. As we've previously reported, the Board and management have been focused on a number of key strategic priorities to drive revenue and earnings growth moving forward and increased return to shareholders. Our overall strategy centers around 3 areas of specific focus, growing and consolidating Wagner's core construction material business, both utilizing our existing expertise and experience to grow and consolidate the business and pursuing opportunities that add accretive value to our vertically integrated business model. We also remain focused on pursuing major projects, levering our expertise and experience from our core construction materials business, whether that be domestically or globally, and growth in different product and markets, particularly in our CFT business, where we see an opportunity to leverage and expand opportunities where our products provide an advantage overall alternative building materials. . Looking at some of the current priorities for the business. As a group, there is a focus on both our capital management program, in particular, the evaluation criteria for future CapEx deployment and disciplined management of inventory. In Construction Materials, we remain committed to the investment in our Southeast Queensland concrete plant expansion. As I mentioned earlier, one new plant, south of Brisbane is in the commissioning phase and 3 new plants are in various stages of development or the approval process. The successful execution of this strategy will deliver value to the group through many of our business units, not just the concrete business due to our integrated business model. In terms of strategic priorities in our CFT business. In Australia and New Zealand, we are wanting to leverage off our significant asset base and deliver on opportunities that improve profitability. The emphasis is now on securing high margin, risk-reduced projects and material supply and to continue to improve our manufacturing and deliver efficiencies across the business. [ Poles ] is obviously a key focus as we now have the capabilities and capacity to deliver what we see will be an additional baseline product to complement our cross-sale supply. This is only possible due to the significant capital investment we've made in prior years. In the U.S., the focus must be on business development in our identified markets and products to establish a sustained pipeline that will start to provide a contribution to our group earnings. In the meantime, the business has been rightsized to ensure the losses are minimized and don't continue as they have to date. Now while on strategic priorities. During the year, we commenced a process to formalize an ESG strategy. We recognize the importance of aligning our business strategy to upcoming reporting requirements and acknowledge that ESG plays a critical role in our working environment. We engaged an ESG advisory group to provide guidance, to ensure we are making informed decisions and commitments to measure and improve our current ESG-related practices across our business. So turning on now to the outlook of Wagners. If we start by looking through and beyond FY '25 in terms of a medium-term outlook, we expect demand for our core products to remain strong. We have a solid forward order book across all areas of the business with several contracts secured for the longer-term supply of materials and project services. There is no doubt the demand we've experienced in FY '24 for innovative products, particularly our composite products will continue to increase, driven by both an expectation and effort to reduce construction costs, increase energy efficiency and improve sustainability. And finally, we are in an extremely favorable resources environment, and there's a robust civil infrastructure pipeline, particularly in Southeast Queensland with anticipated population growth, along with the 2032 Olympics, which will, at some point, require significant construction materials and services to deliver on the enormous infrastructure requirements for those games. We're well positioned to take advantage of these opportunities. So now narrowing in on FY '25. There are a number of segment-specific considerations regarding our FY '25 outlook. Given the continued strong trading conditions experienced over the first 6 weeks of FY '25, we are confident that the demand for construction materials will remain high. In particular, concrete volumes are expected to increase as a result of the quality of our supply, the majority of our plant network and the addition of new clients and the forecast demand based on the anticipated level of commercial and residential construction activity during the year. The investment in the plant at our Wellcamp quarry will deliver improvements in production capacity and product mix, along with cost reductions. Our steel business is expected to deliver growth, while margins are somewhat impacted given market conditions, Demand remains strong, and we will look to expand the business with an additional fabrication facility over the coming year to efficiently service the increasing demand we expect in Southeast Queensland. In Project Services, the bulk haulage business is expected to deliver a similar result to FY '24, given the long-term nature of the contracts we have in place. We've made no secret of the fact that there is no major precast project secured to replace the Sydney Metro project that we completed in FY '24. This will impact our earnings for FY '25 compared to '24. However, this was always expected given the large scale of that project. With the decision now made to exit the Wacol facility, our focus will be on exiting the site while pursuing opportunities that we can deliver from our company-owned purpose-built precast facility, which we're very excited about. In our Composites business, while FY '24 was a mixed result given an unfavorable project and the U.S. business not performing as we hoped. It did show plenty of promise. We're excited about what FY '25 has to offer with continued demand for composite products expected to increase. We have new long-term contracts secured for the supply of composite poles. Crossarm volumes are expected to remain consistent given the efficiencies of our automated Crossarm line, coupled with further automation development and general focus to drive business efficiencies and we expect margins to improve in FY '25. Multiple custom-build projects have been secured for delivery during the year at favorable margins and low risk profiles. There's a strong focus on the U.S. business, as you'd expect, following the rightsizing of the business in FY '24, given the limited revenue we achieved. We've appointed a new executive, John Dignam, to oversee both the Australian and U.S. operations to drive continuous improvement and innovation in CFT. The U.S. business remains the key priority in his first 6 months. John has determined to deliver results, and it is our expectation that this will be the case across the entire CFT business. So in summary, it's been a really positive 12 months. Our results reflect this. The environment has been positive and we've positioned the business to be able to capitalize on the opportunities that lie ahead. We've had the ability and capacity to supply to the market, we've driven efficiencies into the business where we can, we've optimized our manufacturing and production capabilities and focused on costs and delivered what our clients and customers have asked for. Over the past few years, we've invested significant capital into assets across our business and now seek to leverage on those investments to drive profitability across the group. We're extremely excited and motivated to capitalize on growth opportunities moving forward. As you may have seen in an announcement made late yesterday, Lynda O'Grady has resigned as a Nonexecutive Director of Wagners, and I'd like to take this opportunity to acknowledge Lynda's valuable contribution. We all wish you well in your future endeavors. And certainly, thank you for your contribution to Wagners since we listed back in 2017. And on that note, I'd like to conclude the formal presentation for today. And as always, Fergus and I are happy to take any questions that you may have.

Great. Thank you, Cameron. We do have a few admitted pre-submitted questions, but I will kick off first with Liam Schofield from Morgans. Liam, you should be able to talk. Please go ahead.

Perfect. Can you hear me there, guys? .

Yes, Liam.

Great. Can you -- just on the -- I suppose the strategy around expanding the batch network, can you just sort of talk about, I suppose, the unit economics of those additional batch plants and more broadly, what's the profitability of cement as a division looking like? And where do you see that going with the expanded plant? .

So as you know, the concrete plants are really market -- access to market for our cement business, Liam. So the concrete business itself has had significant improvement this year, and we've seen that improvement through pricing and gross margin. So -- and that's probably given us more confidence given the outlook around demand for concrete that Cam called out before to look to expand the network. What that does this does provide significant benefit not only to cement but also to our aggregates business and our flyash businesses because they all pull through from that -- those businesses into concrete. From a cement point of view, we've seen the cement business, as [indiscernible] to the EBIT margins have increased by more than 50% or the EBIT has increased by more than 50% on last year, and the margins have improved as well. So for us, it stacks up. It's a good time to do it. We believe the macroeconomic demand for building materials in this area will continue, and it will help us with our integrated business. .

I guess, Liam, the other thing it does is it opens up a larger customer profile for us. we need to spread our footprint, opening up new geographical areas and consequently new customers that we don't have access to at the moment because our plant may be too far from where the action is. .

Perfect. Well, maybe just one follow-up, if I may. You flagged out that bad debt in New Zealand. Can you just give us a little bit of background there of what sort of transpired? And I suppose what measures are you putting in place to kind of make sure that doesn't happen anymore. .

It was an installation job, effectively a civil installation contract job, and we don't do too much of that work. We do see it as high risk. And the measures in place are just simply not to do that type of work. We're a material supplier at [ heart ], and it's certainly our preference to remain that way and manufacture and supply the materials and wherever possible stay out of the installation work. On this case, we stepped in to help the New Zealand Road Traffic Authority by agreeing to install it, and we had a contracting model that was not appropriate for the risk that we took on. So that's, in essence, what happened. And it's certainly not our desire to do any more of that installation type work wherever we can avoid it. And where we have to do it, we will be how better at managing it.

[Operator Instructions] As I said, there are a few pre-submitted questions. Just on dividends, you declared a final dividend of $0.025 per share. Can you just remind us of the last time you paid a dividend and what's the Board's overall approach to dividends? .

Sam, it was back in 2018, last time we were in a position to pay a dividend. The Board's approach is to continue to pay a dividend, while ever the business environment supports that. So we are pleased to get back to dividends this time around. And as long as the business can support it, it's our intention to continue with it. .

Okay. Great. And just on debt reduction. Net debt is essentially half this financial year. What's your current objective for remaining net debt and the balance sheet more broadly? .

I think we do a lot of work, obviously, to get that net debt down. Where we are sitting now, we're quite comfortable with our leverage ratio. I think looking forward, as we've called out, we've got some concrete plant expansion that we want to do in a measured way that will have a significant capital impact or cost. And so I don't see us trying to reduce debt. We will continue to manage our debt at or around similar levels. But we feel as if we're in a really good spot to capitalize on any growth opportunities that come up. We do have headroom in our covenants to allow us to do that if we need to use that short term for an opportunity. So we're quite comfortable with where we are. .

Great. Thank you. On the inventory management, you mentioned on a couple of slides, including the strategy section, around disciplined and active management of inventory. Can you elaborate on this, please? And what we can expect for FY '25.

So inventory, we have a lot of different moving parts in inventory across a lot of the different businesses. we've moved to -- a lot of the businesses are in a just-in-time sort of model on our inventory management. Now some of that -- the volume has gone down, but the prices have gone up. So we haven't seen the reductions in inventory that we probably would have liked. There are other businesses, though that we still need to work on our inventory management, and there is opportunities there to continue to reduce inventory. So those businesses, is that we need to look at are the ones that we'll be putting our focus on in the next couple of years. .

They are the ones that we really sort of geared up and protected through COVID. We need to run that stock back down now to an appropriate level now that supply chain is reliable. .

Great. And just one final question, unless there's any others submitted. On the impact of Sydney Metro, if we assume $5 million of precast contributions for the second half of this year, which is not to be repeated next year and add backs have increased operating performance given the demand environment. Is that a reasonable place to start FY '25?

Yes, look, that's probably a pretty good assumption that sort of makes sense what you're saying, I guess.

Okay. Great, guys. Well, that's it for questions. If there are any more questions, feel free to e-mail them through and we'll endeavor to get back to them. And I'll just pass you back to Cameron and Fergus for any closing comments.

Thank you, Sam. And well, I guess, just thanks very much, everyone. As I said, we're very sort of happy with the performance of the business this year, and we're looking forward to the year ahead. There's a lot of hard work to do, and we're sort of up for it and excited about the opportunities that we see ahead for wanes. So thanks for the time today and showing the interest to listen in. And we'll close it off at that. Thank you.

Thank you. That concludes Wagners' Full Year FY '24 results call. Thanks, and have a great day.