Macmahon Holdings Limited (MAH) Earnings Call Transcript

Thank you for standing by, and welcome to the Macmahon Holdings Limited Financial Year 2025 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to the conference call host with Macmahon's CEO and MD, Mr. Mick Finnegan and the company's CFO, Ms. Ursula Lummis. Please go ahead. .

Thank you. Welcome to the McMahon results presentation for financial year 2025. And thank you for joining us today during the busy ASX reporting period. As always, we appreciate you selling an interest in Macmahon and the opportunity to run through today's presentation. I'll provide an overview of our results and Ursula will run through the financials in more detail. I'll then conclude with some comments around our strategic priorities and outlook. After which, we will be happy to take questions. Starting with the financial highlights on Slide 2. I'm really pleased to say we had another strong year with the business, again, delivering revenue and underlying earnings growth. We continue to improve our return on average capital employed, which was driven by a disciplined approach to capital expenditure and higher free cash flow generation. This allowed us to again increase our dividend payout ratio to shareholders. Reducing our capital intensity in the business has been a focus of management for some time, and we are now seeing tangible results from these efforts through increased earnings, cash flow and returns to shareholders. We will continue optimizing our capital utilization going forward. . The positive FY '25 performance has been delivered in a period characterized by volatility in some commodity prices from tariffs and trade tensions as well as continued elevation in some costs. Macmahon has a diverse order book and client base, and we closely monitor and manage costs and risks. We will continue to execute on our strategy to deliver value for our clients and our shareholders. While Ursula will run through the financials in more detail, there are a few key call-outs I'd like to make. We achieved new records for revenue and EBITDA of $2.4 billion and $171 million, respectively, and we saw improvement in our EBITDA margin to 7.1% from 6.9% in the prior year. Strong cash flow generation was a key highlight as a result with underlying operating cash flow up by 35% to $407 million and free cash flow up 89% to $141 million. This is where our growth strategy to increase the scale of our underground and civil businesses has been successful, supporting a more robust balance sheet with lower debt levels and increasing dividend returns to shareholders. While net debt was up 11% year-on-year. It was down over 30% from the first half position, which included the acquisition costs of Decmil. Importantly, it is now back at FY '24 levels with gearing dropping to 19% after the acquisition of Decmil, in line with our expectations for the year. Total dividends for the year increased by 43% to $0.015 per share fully franked, representing a payout ratio of 31% on underlying earnings per share. ROACE was 20.5% for the year, reaching our long-term target of 20% and up from 7.5% at the half. We believe we can continue to increase ROACE through our strategy and the increase -- and we have increased our long-term ROACE target to 25%. Finally, it was good to see growth in our order book with solid contributions from Decmil. The order book as at 30 June was $5.4 billion, up from $4.3 billion at the half year, and $4.6 billion at the end of FY '24. The order book includes $2.1 billion of work locked in for FY '26, and that excludes short-term civil and underground churn way and future contract cost escalation recoveries as per our usual reporting practice. Slide 3 shows our historic performance relative to our guidance, and I'm very pleased we've been able to maintain our track record of meeting or exceeding our market guidance again in FY '25 and now for the ninth consecutive [indiscernible]. During this period, we delivered a CAGR in revenue of 27% and 22% in EBITDA, underscoring our successful business strategy that has delivered reliable earnings growth over the past decade. I would again like to thank the entire Macmahon's team for achieving this and we're very motivated to maintain this track record into the future. Slide 4 shows some of the highlights in our mining business during the year, which contributed the majority of revenue and earnings. EBITDA margin contributions were strong, but the main point I want to call out is that circa $2 billion of new work was won in FY '25. This included over $1.4 billion of work in surface mining in Australia and Indonesia. That includes a $900 million extension of [indiscernible] and $463 million contract at a WAC mass gold project. In addition to this, we are pursuing a surface pipeline of $7.7 billion, of which is currently expected to be awarded in the next 12 months. Underground also had a successful year winning close to $600 million of new work, including $105 million extension at Deflector a $90 million extension at Dade Milano and an interim contract at the Paolo Gold project that is expected to grow well over $300 million. The underground business is growing in line with our strategy and now comprises 23% of group revenue. We continue to target a growth of over 50% in the next 2 years. This is underpinned by an underground pipeline of $6.1 billion, of which $2.6 billion is currently expected to be awarded in the next 12 months. Now over to Slide 5 on our Civil business. The business has quickly grown to comprise 18% of Grid revenue and contributed 15% of EBITDA. Decmil performed well and in line with our expectations for the year. The business is now fully integrated, including the completion of all legacy projects. The key focus for Decmil was building the civil infrastructure order book, and I'm pleased to say that this was a key highlight with over $500 million of new work won since the acquisition of the business, which includes around $100 million of wins in FY '26 already. I won't go through the list you see on the slide, but note that we included a broad variety of civil works across roads, accommodation villages, infrastructure and wind farms. We are targeting robust growth from all of these infrastructure areas with a $10.4 billion Civil pipeline, of which $2.6 billion is currently expected to be awarded in the next 12 months. I'd also like to reiterate that we have retained the disciplined tendering and risk management approach we highlighted at the time of acquisition of Decmil. Slide 6 outlined some corporate level highlights for FY '24, outside of our operating businesses. The HomeGround Accommodation Village acquired through the Decmil transaction is our largest noncore assets. We continue to evaluate options and monitor the asset. I outlined at the half year result that we had commenced an orderly and considered process, and this will continue in order to get the best outcome. HomeGround achieved 27% average occupancy for the year and is supported by a favorable local environment with several large development projects planned or in the process of commencing around Gladstone. Other corporate-related activities during the year included the replacement of our existing finance facilities with a new 4-year $550 million syndicated debt facility that provides us with a simplified structure and improved pricing, covenants and terms. Slide 7 lists some of our key surface morning projects, their tenure, cost curve profile and related commodity exposure. I'd like to go through the list now, but some key characteristics include the blue-chip nature of the client base, including Regis [indiscernible] folks Diversification across a number of key commodities, including gold, copper and coking coal and typically long-life projects, including some life of mice. Slide 8 shows our key underground mining projects. Like in surface, we have sought a diversified portfolio across clients and commodities, typically with long mine life. We also monitor their position on the cost curve and factor these into our risk assessments. Another point to highlight is some of the clients where we do both the surface and under greener mining, such as Anglo Ashanti, Regis and Volt. This highlights the competitive advantage of having an integrated service offering. Our list of key civil projects outlined on Slide 9 has grown rapidly in the last 12 months. acquisition of Decmil. Again, I'll leave it to you to go through the details when you have time, but some key points include a quality client list with a number of repeat clients, a diverse range of projects covering roads, accommodation, bridges and wind farms, a majority of higher-margin design and construct projects but also some construct-only where we use a more flexible contract structure. And while we do some risk lump sum contracts for some of our design and construct projects, we also have a range of variable cost reimbursable and allowance to contracts to proactively manage contract risk. A key feature on the previous slides for our different businesses is the diversity of our client list and operations. Slide 10 summarizes our revenue diversification across 4 key factors. I've touched on client and commodity diversification in the previous slides. However, at a group level, this slide shows more clearly the diversity in our business. You may have noticed our kid morning projects on the previous slide were well represented by gold. This has been a longer-term feature of our order book and the markets we operate in, and we continue to have a relatively large exposure to gold and copper at around 58% of revenue. The business does have diversity in commodity exposure and particularly by client, and we continue to monitor and manage this in our tender pipeline. We have been diversifying our business mix towards the lower capital-intensive businesses of underground and civil infrastructure for many years. And these now account for 42% of group revenue. Our surface mining business was successful in winning over $1.4 billion of new work during the year, which helped maintain the surface revenue contribution when compared to FY '24. We have a very strong pipeline of opportunities in underground and civil infrastructure, and we expect these businesses to continue to grow strongly and increase overall share of revenue. Moving on to Slide 11 on Paper and safety. The safety and well-being of our people is our highest priority at Macmahon, and we continue to invest in this area, both in the development of our people and in continued safety improvement -- our safety performance improved in FY '25 with total recordable injury frequency rate decreasing to 2.99 from 3.64 in FY '24. This was with the workforce 6% larger than last year at 10,220 people. Training and development continue to be a priority areas, both for safety and also for upskilling the career development of our pas. At 30 June 2025, we had nearly 700 people on various training programs from apprentices, through the structured leadership training. Specifically, under leadership and development, 350 leaders have now completed the Macmahon winning way leadership program. This is in addition to the rollout of the new programs, including critical risk and psychosocial safety leadership training and an emerging leader program. Other development initiatives included upscaling 31x defense people across heavy diesel mechanic trade upgrades under an industry program for Australian Defense Force bed trips. As you will know, Mental health is an important part of our safety and people program. We rolled out our strong mine, strong mines wellness program to 22 slots with a total of 250 wellness champions now trained and across our workforce. Our commitment to workplace State and Wellbeing includes a commitment to continue building a safe, respectful and inclusive workplace. Overall female representation in the Australian-based workforce was 19% across all occupations and First Nations people represent 4.2% of the Australian workforce. A positive culture is a key part of working at Macmahon. Slide 12 outlines some of the initiatives in the business designed to develop and promote Macmahon's culture and values, ensuring this is a key part of our people development programs. Culture and fit is assessed at recruitment defined during onboarding and embedded throughout the employment life cycle. Some of these programs, I have already mentioned and you aren't familiar with, but they include respective Macmahon. The Macmahon winning way, emerging leaders programs and challenge developed growth. Operating our business sustainably is a key objective for the company. And Slide 13 outlines some of our sustainability related activities and metrics for FY '25. I I've already mentioned some of the social and people-related programs. We also continued to take important steps during the year to manage our environmental impact and maintain strong and appropriate governance. Macmahon's 2025 sustainability report is available on our website and contains more information on all of our ESG-related initiatives. I am conscious of time, so I won't go through the detail on the slide now. But I will hand over to Ursula to talk through the financials.

Thanks, Mick. Good morning, everyone, and thank you for joining us today. I will take you through our profit and loss, cash flow and balance sheet over the next few slides. But before I do that, I want to take a brief moment on Slide 15 to highlight our annual performance over time. . The slide shows steady and consistent annual improvements in revenue, underlying EBITDA, underlying EBITDA and return on average capital employed, all of which are at record levels. Margins have shown consistency across time with a resumption in EBITA margin growth from 5.9% in FY '22 to 7.1% in FY '25. Slide 16 shows a summary of our profit and loss statements. mic has covered to the high-level numbers. So I'll touch on some of the other figures and provide a little extra content. The 20% growth in revenue and 22% growth in EBITA were mainly attributed to the acquisition of Decmil, the commencement of new projects, including ULCs, CPM and the WCMA in addition to continuing organic growth and cost optimization across the group. It is important to remember that the Decmil acquisition was internally funded with no requirement for additional capital from shareholders. Therefore, the acquisition was earnings per share treats. Underlying EBITDA growth was lower at around 10%, and this is primarily due to the inclusion of Decmil, which has proportionately lower CapEx and also the continued reduction in the capital intensivity of the business, therefore, lowering the proportionate depreciation charges relative to the revenue growth. Our EBITA margin was back up over 7% for the year. primarily as a result of the work we won during the year moving from mobilization and start-up to steady state and operational improvements across the business in the second half, which included the renegotiation of certain contracts. The higher margins are impacted by the inclusion of Decmil with lower margins across the year, which is typical for a civil infrastructure business, however, has higher cash flows and return on capital employed as a capital light business. Reported borrowing costs were slightly down. And with the refinancing of our debt facilities towards the end of the year on improved terms -- this should help maintain lower interest expense. Underlying NPATA excluded adjusting items of $28.4 million, which relates to the share-based payments expense of $7 million, $8.5 million for the merger and acquisition costs plus some customer amortization with the acquisition of Decmil and the software implementation costs. Our effective tax rate for the year was 32.2%, which included withholding taxes for the return of cash from Indonesia. As Australia is now fully in a tax-paying position we do not expect the effective tax rate to deviate from the 28% to 30% range going forward. Finally, as Mick mentioned earlier, the total full year dividend was increased by 43% to $0.015 per share with a payout ratio of 31%, well within our FY '25 quality range of 20% to 35% of EPS. We have increased this range to 30% to 45% of underlying EPS for FY '26. Slide 17 sets out our major cash flow movements between the closing net debt last year and this year, including a strong uplift in the free cash flow generation. While the chart shows year-on-year net debt increasing a little by $16.9 million to $162.5 million. This includes internally funding the Decmil acquisition of approximately $115 million in addition to $221 million of capital expenditure. The net debt at the half year was around $237 million following the settlement of this acquisition. So finishing FY '25 with net debt back towards our pre-acquisition level was an important achievement, demonstrating strong cash flows and delivering on our target for the year. Strong underlying operating cash flow before interest and tax of $407 million was the main drivers to retain a consistent net debt year-on-year after the acquisition of Decmil. With strong working capital management the cash conversion for the year was 105%, which included the final payment for the FY '24 Doosan equipment sales. CapEx of $221 million was in line with expectations and included sustaining CapEx of $186 million and $35 million of growth capital. Our CapEx target for FY '26 is $245 million. The free cash flow generation of $140 million was up nearly 90% from last year and was primarily applied to debt reduction, but also supports reserves to shareholders and investments on corporate developments. I'll finish with some comments on the balance sheet movements on Slide 18. We've covered the movements in debt. So the larger balance sheet numbers, you will see for FY '25 compared to the prior year primarily reflects the acquisition of Decmil. I previously mentioned that Macmahon has utilized its prior year tax losses in Australia. Additional acquisition included another $58 million of tax losses, which will be utilized over the coming 10 years. and $54 million of franking credits available for future dividends. You will also see that the HomeGround campus in our books that are carrying value of $52 million. And Mick had mentioned earlier that we have some process to evaluate how we can best monetize this noncore assets over time. We recently restructured our debt facility to retire the legacy facilities and provide a simplified structure with improved pricing, covenants and terms. This slide provides a breakdown of our borrowings as of the 30th of June 2025. So I won't go through this in detail other than to highlight that the business is in a very strong position with regards to our available liquidity, with cash and available submitted banking facilities of $538 million at the end of June 2025. Finally, Nick highlighted earlier that our FY '25 return on average capital employed of 20.5% exceeded our long-term target of 20%. This target has increased from 15% to 20% only recently in the first half of FY '24 results. The reaching an increased target has been an excellent result and reflects our focus on reducing the capital intensity across the business. Our return on average capital employed target has now further increased 25%. Thank you for your attention, and I will now hand back to Mick before we open for questions.

Thanks, Ursula. If we move to Slide 20, I'm pleased to say that the numbers we have delivered today and in recent results confirm that Macmahon has achieved initial success at reducing capital intensity in the business. And I'd say initial because we still have further opportunities here and there are still more gains to be realized. You can see from the chart on the slide, the progress we have made in increasing the contribution to the business of firstly underground and more recently, civil infrastructure, both with lower inherent capital intensity and surface. We have also looked at ways to reduce capital intensity in our surface business, and you have seen this in some recent initiatives. The resulting business mix we have today has been a key driver of improving our ROACE and reaching our 20% target, which we only upgraded some 12 months ago. You can see on the slide, the opportunity to further grow underground in Civil, which makes up around 2/3 of our $24.2 billion tender pipeline. And of course, increasing the Indonesian contribution only improves key metrics more. In line with our strategy to continue targeting lower capital-intensive projects and a more easing business mix, the group ROACE target will now increase to 25%, as Ethos at a moment ago. Moving to Slide 21. I'd like to briefly comment on the order book. As I mentioned in my opening remarks that it was good to see growth in our order book to $5.4 billion at 30 June, up from $4.3 billion at the half year and $4.6 billion at the end of FY '24. We saw a good level of contract awards across the business with over $1.4 billion worth of work won in surface, close to $600 million in underground and more than $400 million in civil infrastructure in FY '25. The order book includes $2.1 billion of work locked in for FY '26 and excludes short-term level and underground churn work and future contract cost escalation recoveries as per our usual reporting practices. The tender pipeline remains robust at around $24.2 billion with considerable opportunities across all areas of our business. We have around $8.2 million of outstanding tenders submitted that we expect to be awarded in the next 12 months. Before I conclude with the outlook, I'd like to recap Macmahon's capital allocation policy summarized on Slide 22. Our policy continues to reflect the importance of balancing dividend payments to our shareholders and retaining financial flexibility to enable the continued execution of our strategy. The charts on the slide show our track record. And you can see that we have managed our debt within the guide rails while growing earnings per share and dividend returns to shareholders. This has been a result of our focus on strategic growth but also achieving strong business performance, disciplined cost management and delivering for our customers. To wrap up now on Slide 23, I'll conclude with some comments on the outlook. Our priorities for FY '26 are consistent with those in FY '25, operate safely, continued operational improvements, drive growth in underground and civil infrastructure and work towards our increased target while generating strong free cash flow. We will also continue to invest in our people and in technology to build our capability and deliver us to our customers. The outlook for FY '26 remains positive. Mining activity remains robust in Australia and in Indonesia, and we have diversity in our commodity and customer exposure. We have a stronger order book than 12 months ago at $5.4 billion, with $2.1 billion of debt already secured for FY '26. The Importantly, our pipeline of opportunities remain strong for all our segments, and we are well placed to continue growing revenue and earnings supported by a healthy balance sheet. Releasing our guidance today for FY '26 6, we expect continued growth in both revenue and earnings. Revenue is in the range of $2.6 billion to $2.8 billion and underlying EBITDA between $180 million to $195 million. I am confident we are focused on the right priorities and remain well positioned to continue our positive growth trajectory. With that, I'd like to hand back to our operator now and open for questions.

[Operator Instructions] The first question today comes from James Lennon with Petra Capital.

Just 2 questions from me. I mean that's a really impressive next 12 months in terms of tenders that are up for awards. Just keen to know what does that mean for pricing? How is the environment looking competitively?

Yes. Look, thanks for the question, James. It just feels sensible at the moment in terms of pricing. And it obviously gives both clients and contractors choices and options. So the desperation just doesn't seem to be there. And clearly, that's off the back of the addressable market, and that's very visible in our pipeline. So I don't think you'll see the effects of previous cycles where either contractors or clients had leverage. I think everything is a lot more sensible now. So I think plays towards longer relationships, more sensible relationships. They're more transparent and contract models that make sense. And as an example for us, it just gives us a choice given the journey we're on to get net debt towards that $100 million, and we hope to get there next year pre-any sale of HomeGround gives us an ability to be a little bit more selective within that, knowing some other -- some of our peers have appetite for different things. So yes, it seems sensible. It gives everyone choices. But of course, you can never get cocky or take your eye but you need to make sure that whatever you do, do you execute well.

Right. And just a follow on one. I think you've mentioned in the past you had a longer-term target of $1 billion from each segment, $3 billion in total, which you look like you're well on track to do. Do you feel the need for M&A or organically, given what you've got in front of you, you can do it all organically?

Look, we think we could do it organically, James, and the addressable markets are certainly in front of us. And again, it comes back to execution. That's your biggest marketing tool, of course. But having said that, the success at Decmil being able to internally fund it has shown that if something comes up, we would look at it as well if it will accelerate that. But we're not desperate to do it. So if something comes up that makes sense, I think we're in a position to look at it and do something that would be within our means. But I haven't got my finger on anything or we don't have our finger on anything at the moment. So the focus is on execution and organically growing that. And of course, we've said there's 3 areas in terms of civil, underground and surface. But don't forget that the addition of Mobi Indonesia from 8% to potentially 15% really does add to our margin. And that contributed a little bit to the improved margin in the second half of the financial year just gone.

[Operator Instructions] The next question comes from [ John Schultz ] from Argonaut.

A quick question just on the current projects in contract. But when I mean obviously, if you guys were at the Vault side to it and there was chat about, does that continue or go to owner operate it. But can you just touch on maybe the bulk contracts, the Anglo contract, would that potentially shift in hands and just there's an increase in work at Greenbushes with Talison as well?