Aveng Limited (AEG) Earnings Call Transcript

Welcome, everyone, to the Aveng interim results for the 6 months ended 31st of December 2025. My name is David Simpson, and I'm the Interim Chief Executive Officer of Aveng. I'm here with Adrian Macartney, who is the Chief Financial Officer of Aveng. You'll see on the screen at the moment the Queen Salote Wharf that was recently opened by the King of Tonga. And this is evidence of how the Aveng Group is living one of its values in providing a better life, specifically in Tonga in this circumstance. So today, we'd like to work through an agenda that starts with our salient features, our strategy update, financial results, market outlook and then some key messaging at the end. And Adrian and I will both share some of the different parts of the agenda. The picture that you're looking at on this slide is the Bundha Sports Center in Victoria, which is a very successful project from our Built Environs team. In relation to salient features, we've focused on one of our key projects in Melbourne. And so this is the Swanson Dock West Remediation. It's a McConnell Dowell project, which is the Australian Infrastructure division. And both Adrian and I visited this site a couple of weeks ago. And one of the special things about this site is that the team have come up with some independent technology to make not just the site more efficient from a work perspective, but also much safer. So congratulations to that team. Now turning to our results. I'm pleased to report that we've returned to a modest operating profit, and this is supported by an improved net cash and an increase in work in hand. Our revenue is $1.2 billion. Our headline earnings, $0.3 million. Our operating earnings before capital items, $9.4 million versus a $31 million loss in the last period. And our headline earnings per share is $0.02 per share as opposed to a loss of $0.267. I'm pleased to advise that we have an increase in our net cash from $211 million to $250 million, and also pleased to advise that our work in hand has grown from $3.2 billion to $3.5 billion. What I intend to do now is to talk through some of the elements of our H1 performance and some of the things that have helped us return to a modest operating profit. That modest profit has been produced by an improved performance across our entire portfolio of projects. It's been supported by ongoing enhancement of our risk management, including our risk assessment tools and our risk appetite. However, it's been tempered by losses on Kidston and J108. More focused on infrastructure. The New Zealand and Pacific Islands exceeded their performance targets through consistent operational excellence. Australia returned to a modest profit despite recognizing an additional loss of Kidston. However, Southeast Asia recorded an operating loss for the period -- a further loss for the period on J108. We are in advanced negotiations with our client on that project, and we have also derisked it, which I'll talk about going forward. In addition, we have seen a provision for warranty claims in Asia on a separate but unrelated contract. In our Building business, I'm pleased to report that we have exceptional operating earnings, and that's from continued project execution and the completion of some key projects we won in 2025. In our Mining division, our half 1 performance, Gamsberg continues to perform well. It has got increased volumes, sustainable margins and a capital program that supports the project. However, the Tshipi contract remains a drag on the Moolmans business with planned volumes and profitability not being achieved. Renewed efforts have been made to seek a commercial settlement with the client. However, the contract in its current form is not sustainable, and management are considering all options to bring this to resolution. In relation to our work in hand across the business, this has improved in the Infrastructure division in New Zealand and the Pacific Islands and Australia with new work won in our chosen disciplines. We have currently a strong order book in Building, and that arises off the back of some focused tendering and winning in health care, recreation and education sectors that are being supported in the market. Our cash continues to be well managed. We've got strong cash generation for this half, but we will see early -- that was something ring from early cash receipts, and we'll see that the working capital reductions are likely to reverse this out somewhat over the next reporting period. So we've had some key areas of focus. This has brought stabilization to the business and create a stable platform for our future. That derisking of our portfolio of projects has been evidenced by improved project contingencies and provisioning, corresponding decreases in identified risks and a sustained reduction in uncertified revenue across our key projects. We've seen a decrease in noncontributing revenue to less than 10% of our portfolio, and these actions have made a much more balanced portfolio across the business. We've also been focusing on improving our gross margin performance. When you look at our business, it's a fundamentally sound business. We have strong engineering, we have strong delivery capability, and we have staff that are dedicated to the business. We're performing a business efficiency review currently, and that is underway and will be implemented over the next several months. We continue to focus selectively on delivering in our key markets. So our operationally key markets remain as transport, ports and coastal, water and wastewater, energy resources building and contract mining. We've put a lot of work into refining our risk appetite and our risk assessment tools. We're also putting greater scrutiny at the go/no-go or the pursue/no pursue stage of a tender, which is at the very front. This scrutiny enables us to work with the business lines to make sure that we're spending our money to tender things that are actually on strategy and within our risk appetite. We've also had a key focus on strengthening our risk management framework. We've strengthened the project management office. The project management office head reports to the Chief Executive Officer. We're focusing on implementation of the revised risk management process, and we're putting in improved tools around risk assessment, risk identification, tendering and the delivery of projects. When we came to market in the last reporting period, we called out 2 projects, and I'd like to give the market an update in relation to both of those projects. In relation to the Kidston pumped storage hydro, which you can see the photograph of on the right at the top, despite the complex nature of the work and the need to resequence some major work activity as instructed by the client, the project achieved its required productivity on the site for the 6 months period in accordance with that plan. During the period, the cost and program to complete were reevaluated, necessitating a further recognition of loss. Subsequent to the period end, the client issued an instruction to suspend work and directed all staff to demobilize from site because they had some issues in relation to their camp. I can tell the market now that the site has remobilized following a direction to do so by the client and our workforce are back up there working now. The program for work remains intact. However, the program to completion has been extended. And the cash outflow required to complete these works will be realized through the second half of 2026 and in financial year 2027. This will be funded by existing cash balances. The commercial position in relation to the Kidston project remains as claims and delays that are beyond our control in the project team are the subject to commercial claims and negotiations with the client, and I am personally involved with those with our partner, John Holland Group. In relation to Jurong Regional Line, J108, I'm very pleased to advise that this is now significantly derisked because we've achieved basic structural completion with the last of the 3 stations handed over in December 2025. We're also in advanced negotiations with our client for a commercial outcome. There's a picture of the Jurong Regional Line down in the bottom right-hand corner of the slide. What I'd like to do now is turn to a little more of a deep dive in relation to each of our segments. And I'll cover infrastructure, I'll also cover Building, and then I'll ask Adrian to cover the moolmans segment because Adrian has operational responsibility for South Africa. So in relation to Infrastructure, we've seen our portfolio's risk improve despite some operational losses. If you turn to the right-hand part of the slide, our work in hand is $1.8 billion, up from $1.2 billion. And down in the bottom, our mix of work is 30-30-30 between relationship, construct only and D&C., and so in an infrastructure business that's healthy. It contributes to 64% of our revenue. If we zero down into New Zealand and the Pacific Islands, they're exceeding their performance targets as a business. And they do that through consistent exceptional excellence. There's considerable growth in our work in hand following the award of key projects in the water and wastewater areas, airports and transport sectors. So they're still relatively strong in New Zealand. And we're sitting on $474 million worth of projects in preferred status awaiting the green light. Turning to Australia. This has returned to a modest profit despite recognizing an additional loss at Kidston. Project margins continue to improve across the portfolio through improved operational performance, some excellent performance on some key projects and a reduction of non-margin contributing projects. Growth in the order book with projects secured in water, wastewater ports, coastal and transport, which is right on strategy for that business. And we're sitting on 670 -- sorry, $667 million projects in preferred status awaiting the green light. Turning to Southeast Asia, however, we have suffered an operating loss for the period, which includes a further loss on J108 and an additional warranty provision for claims on unrelated completed project. J108 is now derisked, as I've said before, because we've hit basic structural completion, and we're in advanced negotiations with the client. And our focus in Southeast Asia remains on delivering the current contracts. Now if we turn to Building, I'm pleased to say that Building has 100% of its projects profitable with 95% of its projects delivering above tendered margin. This contributes 24% of group revenue, and they have work in hand of $664 million, primarily across South Australia and Victoria with a little bit of exposure to New Zealand. Now in the Building business, as you would expect, the majority of their work is design and construct with some construct only as well. Overall, the revenue continues to grow following some significant work won in 2025. And we have excellent operational earnings with strong margin delivery due to excellent project execution following the conclusion of several significant key projects. They won't be repeated in 2026. Our work in hand is well distributed across South Australia and Victoria, as I've said. Now focusing into Victoria, we have a strategic focus, and we've positioned ourselves in the education, recreation, health care and life sciences sectors. We've got exceptionally strong operating performance in that business. And those sectors that we've put ourselves in are aligned with the government spending priorities going forward. South Australia continues to hold its leadership position in health care, and that's consistent with project delivery requiring specialized differentiating expertise. And at Built Environs and McConnell Dowell, that excellence and specialization in complicated projects is what we pride ourselves on. Turning to New Zealand. We're seeing a continued market softening there in government spend in Building. But we've got some projects where we're doing together with our infrastructure business across New Zealand and the Pacific Islands to try and soften that going forward. And I'll hand over to Adrian for a deep dive into the mining sector.

Thanks, David. Good morning, everyone. The Moolmans business is really in the course of the period, a story of 2 parts. And we do have some ongoing commercial disputes with Tshipi, and that has negatively impacted our ability to conclude a disposal transaction that we've previously described to the market. We are, of course, as a Board, focused on creating a strong and sustainable Moolmans business, and that's what we're working towards going forward. As a result, we do manage cash pretty tightly in the Moolmans business, mainly due to that Tshipi underperformance and those mounting and increasing unresolved claims. Turning to the positive aspects of Moolmans. Gamsberg has continued to perform very well for us, steadily increasing volumes across the period. In the near term, we will be lifting those volumes towards the contractual volumes that we require. And second of all, we will be looking at increasing the volumes above our contractual levels, and we're in discussions with the clients around that. We have a strong capital program. We have a rebuild program at the Gamsberg mine. We've taken delivery of 6 of the rebuilt trucks and have several more in the program of being built. And that program is working very well for us on time and on budget, obviously enabling us to increase our production. At Tshipi, the contract does remain a drag on the Moolmans' business overall with planned volumes and profitability not being achieved. The commercial claims will continue to be raised on an ongoing basis, and we have renewed our efforts at resolving these claims with the Tshipi management. Overall revenues grew for the period with a modest operating earnings and a small operating margin. Important to note that we have not recognized any of our claims in the revenues or margins to date. David, I'll just hand back to you to cover strategy.

Now I'd like to provide a corporate strategy update. Our focus remains to be committed to the strategy of maximizing the value to our shareholders through the performance -- through exceptional operational performance. If we break that down into two areas from a corporate strategy perspective, in McConnell Dowell, during this period, the Board has investigated a range of options in relation to the separation of McConnell Dowell, and concluded that the best route to obtaining value for shareholders at this point in time is for Aveng is to retain its ownership of McConnell Dowell. The focus of McConnell Dowell remains to deliver consistent operating performance across the board to enhance its risk management procedures and processes and to resolve existing commercial matters to grow the work in hand within selected disciplines and within our chosen and appropriate risk appetite. So this will take a longer time horizon than was previously anticipated. In the Moolmans business, we've appointed Peter Van Greunen as the Managing Director, and he's got a mandate to improve performance on both contracts, but also to bring a resolution to the Tshipi contract. As I've said before, the Tshipi contract, as it stands, is not sustainable and management, as a team, are considering all options to bring this to a resolution. Renewed efforts have been made to seek a commercial settlement with the Tshipi client, and there are processes underway. And as a result of that, our ability to conclude a disposal transaction has been negatively factored. And so therefore, we've terminated negotiations in relation to any disposal transaction on Moolmans. Adrian, numbers?

Financial results. Should we go back one? And we'll talk about that. So that's Richmond Footy Club down there in the bottom left. And our Built Environs team are doing a redevelopment of that Punt Road Oval, lovely picture of Melbourne and the G in the background there. If we look at the salient results from a financial perspective, we're around about 10% down in revenues, largely in line with our expectations as we expected a slowing of revenues in the Infrastructure segment, particularly in Australia. Mining and Building recorded increased revenues in the period, and we're continuing to see strong revenue growth in our Building business as we've seen over the course of the last 2 years. Our operating earnings have improved, of course, turning from a previously reported loss in the comparative period and now reporting $9.4 million before capital expenses, and I'll talk about that a little bit later. It was a disappointing performance in the Infrastructure segment, where we did -- we do have a few of the remaining premitigant -- risk mitigant projects overshadowing the performance overall. And when we split that out, we really do see some of those projects really overshadowing things. We are quite pleased with the overall results in the rest of the portfolio and moving in line with our expectations as they improve margins. The current period losses on the 2 projects, we want to highlight those $20.2 million worth of losses that were reported relating to J108 and Kidston. And then, of course, the operating free cash flow, superb performance there, some $40.7 million, and I will talk to that a little bit later when we talk about working capital overall and unpack that for you. Cash on hand ended strongly at some $308 million, up significantly from $267 million at June. If we move on, we'll talk a little bit more specific. Gross margins, as you see there, at 5.6%, an improvement overall. Again, those gross margins subdued because of the losses reported in those major projects. Depreciation and amortization, largely in line with our plans. And then, of course, then capital expenses further down the page at some $3.8 million. Please bear in mind that in the comparative period, we did have a transaction that released capital profits and earnings, and that's why that has changed from a profit to an expense. We do not expect those capital expenses, particularly around the work that we were doing on some of the strategic matters, we won't expect those to recur going forward. Net finance expenses dropping in the period, again, the derecognition of IFRS 16 leases in the prior period as part of the Diamond Point sale. But finance expenses, again, a combination of our net interest earnings and our expenses. We've seen interest rates cool off. And so our interest earnings have declined a little in the period. We continue to monitor that going forward and try to make best use of our cash. And earnings before tax of some $2 million, a pleasing turnaround from the previously reported loss of some $32 million. Our tax number up significantly at $3.6 million, about $3.4 million of that related to profits earned in New Zealand. We no longer have any form of tax shield in New Zealand. We've utilized all previously recorded tax losses. And so we're in a taxpaying position in New Zealand. Our loss for the period of $1.6 million and of course, a basic loss per share of AUD 0.012 per share. Headline earnings for the period and the headline earnings largely is the delta on the derecognition of components at Moolmans. Turning over the page and looking at by segment, you'd notice the Infrastructure segment, $802 million worth of revenues, down, as I've said, in the period. Building growing to $301 million with mining a small growth at $148 million. Our margins in the Building business, exceptional margins there, some 10.5%. Those, I do have to caution that there are a number of projects that reached conclusion during the period, which allowed us to recognize profits right at the end of those projects. And it's unlikely that, that 10.5% would be sustainable going forward. We would expect a cooling of that margin. Very pleasing, though, the $24.3 million of profits in Building. And again, we would expect a cooler second half for the year for the Building business. Infrastructure business, some $4.7 million worth of loss in the period. We would expect and hope that, that would improve going forward. Normally comment on the legacy matters. Those largely relate to legal costs as we continue to wind up old and historical matters. Capital expenses, as I've mentioned in the previous slide, will be wound down. We don't expect a significant expense going forward into H2 relating to those. Earnings across the net finance expenses, earnings and infrastructure, strong cash balances throughout that business. The Building business, again, adding almost $1 million to its profitability in terms of net finance expenses, which is really interest earnings. And of course, mining, as we would expect because of the fact that they do some financing of heavy yellow equipment, we do see finance expense coming through in that business. Capital expenditure came through in the period, some $38.5 million. We do continue to spend money on yellow metal in Moolmans, and that takes the form of component spend together with new equipment. Subsequent to the year-end or to the period end rather, we did have some further equipment that we took delivery of, and we have financed that in January. Work in hand, $3.4 billion, largely in the infrastructure space. The mining space, we saw cool off, and that's in line with our working through those projects and delivering on those volumes. In terms of our financial position, the balance sheet largely there, pretty flat from an equity perspective with a very small movement across the profit and loss in the period. You will notice, our current assets and current liabilities, we have got a shift there, and we'll unpack a little bit about that with the working capital as we go forward. In terms of the financial position, PPE, you will see there some additions to PPE, some $40 million, and we really do focus on the investment in assets from project-specific assets, and we've recently been purchasing some assets out in the Pacific relating to the Fangauta Bridge and of course, our ongoing spend in the mining space for the Moolmans business. That includes both directly owned and right-of-use equipment as we've got there. Depreciation just under 20% per annum, which we believe has been relatively healthy. And of course, we did do some small disposals of redundant assets in the Mining business. We continue to obviously review that all the time, making sure that we are recycling those assets where it is not appropriate to retain them. Moving on to working capital. We do see some significant movement in the period. I just want to touch on contract assets. In the period, we have sold a fair amount of unapproved revenue. And when we convert that unapproved revenue, a large portion of that has also been converted to cash in the period. And so you're seeing a corresponding lift in the cash balances together with that, obviously derisking the business by dealing with that unapproved revenue. Second of all, we did have some early receipts of debtors on contracts. And combined with those, we're seeing this higher cash balance in the period. It did come in higher than we anticipated. And so as David has mentioned earlier, we do expect that to reverse in the coming period as we see the cash rebalance itself against our creditors. And so cash continues to be strong, supporting of the creditors in the business. Moving over to liquidity, the liquidity graph that we generally provide. Generating cash from operations, some $38.5 million. You can see that large working capital change there, some $67 million, a little bit out on cash, on finance charges, taxation. Of course, we paid some taxes, a little bit of proceeds and then our capital expenditure for the period. We did raise some external borrowings. We do, do some short-term financing of large expenses, particularly around insurance payments and IT licensing. We typically raise that in the period and repay large portions of that in the period. So it doesn't typically roll outside of a 12-month period, although we have added to our external borrowings around ABFs. And as I've said, we did some more ABF financing just post this reporting period. We continue to manage cash in two liquidity pools, the South African liquidity pool and Australian. Australia is looking really strong there, as I've mentioned, growing up from $267 million in cash up to $316 million, higher than we'd anticipated at December 31, largely due to some early receipts of cash into the business and dealing with some unapproved revenue where we were able to solve that before the end of the period. Borrowings pretty flat there in Australia. We've started repaying part of the facility there that we raised in the prior year. And the South African facilities increasing slightly as we utilize those for purposes of components and the rest. David, I'll hand back to you now for a market outlook.

Thanks, Adrian. So in the relation to the markets that we're in, we've positioned ourselves, I think, strongly with the market trends. But I'll start with Mining. There's some fragmentation in the mining sector in particularly. There's also ongoing cost and logistics issues in mining, specifically in rail and port capacity. However, we do see some emerging opportunities existing in the SADC region over the mid- to longer term, and we're well positioned for those. If we think about Building, so the building markets in Australia, they remain strong. The government spend is particularly focused on health care, education, recreation in response to the immigration into Australia. We're seeing a little bit of a slowdown in Victorian government spend, although we are seeing an emerging opportunity with data centers that should make up for that slowing down. And in the building market in New Zealand, that still remains relatively subdued, although we think that there's going to be some spending in health and education increasing over the midterm. Focusing on Infrastructure. In the Pacific Islands, we're seeing some opportunities with defense and some other multilateral funding projects. We're already bidding one of the projects in defense. We're seeing a predictable pipeline of projects coming across New Zealand. But in Australia, specifically in transport and energy, we're seeing the timing of the market capacity and the approvals by government and funders moving to the right slightly. And that's the market and all people are seeing that. We're also seeing a move from sort of transport spend to energy spend and other, although we're also interested that the government has now committed to spending money on the strategic planning for the fast rail from Sydney to Newcastle. In relation to preferred status, we currently have $1.2 billion in preferred status in Infrastructure. We have tenders of $1 billion that are currently submitted and awaiting award in 2026. So that's a reasonable position. That photo there is a Southwest outfall for the Auckland McConnell Dowell business. In closing, I'm thinking about our key messages. I wanted to advise the market of where our focus will be at the moment and going forward. So overall, we've taken steps now to stabilize the business to improve gross margin performance. But the reality is there's still work to be done. We're focusing on our risk appetite. We're focusing on our risk management framework, and we're focusing on our risk assessment tools and catching risk at the start of tenders at the go/no-go. We're delivering value to all shareholders, and we're trying to make sure that we have long-term sustainability of all businesses to ensure those forward cash flows. In Infrastructure, in particular, our key focus is to complete the Kidston project within the current plan. We're also focusing on continuing the good performance in the remainder of the balance of projects to secure new work to strengthen our order book within our risk appetite. And our focus remains on delivering the current contracts in Southeast Asia. Turning to Building. As Adrian said, we've had excellent results in building this period. And we want to try and maintain that positive trajectory of growth and possibility, but there's some work to be done there. And in relation to Mining, we want to try and steadily increase the volumes and profitability at Gamsberg, improve our financial performance at Tshipi, and noting that the current version of the Tshipi contract is not sustainable. And so we're considering all options to bring this to resolution. I'd like to finish with a quote from one of our directors that we have made some progress, but we still have more to do. And so with that, I'm happy to finish the formal part of the presentation and open up to questions with Adrian. Thank you very much for your attention.

Thanks, David. We've got a few questions already on the boards. So Dane has been asking what are the reasons for Scott's sudden retirement? Would you like to comment? Would you like me to comment?