Mader Group Limited (MAD) Earnings Call Transcript

Thank you, Harmony, and thanks, everybody, for joining us for the FY '21 annual results for the Mader Group. We're really pleased to be able to communicate our results today. And I'd firstly just like to thank the Mader team for all their hard work, commitment and dedication through what's been a reasonably challenging year, but to deliver results, I guess, we're really happy. So thank you, team, for -- in the field and in the office to helping this go ahead. I guess, look, to give a bit of background for those who aren't familiar, I'll spend a couple of minutes giving some background to the business before we move into our FY '21 results. So as you can see here, we're a specialist services company to the mining and civil industries. Starting off with one man in a vehicle doing field service out in the Kimberley that soon became a bunch of like-minded friends to a very strong culture-driven business that's growing to 1,600 employees today with 700 field service vehicles, supporting nearly 250 customers across nearly 400 mine sites across the world. So a huge amount of growth for this business. Also looking at the time line there, you can see through the years through several down cycles in the market. The group has continued to be able to use the disruptive business model it has to continue to grow through all cycles. The strong culture and belief of the business has really been key to this. Starting out with our founder, Luke Mader, who had that vision, has really infected everybody in the business today, and really, the core of the business hasn't changed. So that culture has remained incredibly strong. The belief of the business model has helped us grow and replicate the business model in a variety of different trades, geographies and service industries. The commitment of the team has been critical to our growth and our ability to continue to attract and retain people in a very tight market and also our ability to deliver a safe and high-quality product through the investment in our people, in our culture, in technology and care for our employees. Having a look on the slides here, we can see the demographic of our business consists predominantly of 25- to 35-year-old trades people. And we've been able to build a business that has given those people a huge variety of options and career parts that they can follow, whether that be different rosters, whether it might be flowing, fly-out or vehicle-based roles, working across different states, across different countries, working on different machine types and our global pathways initiative has allowed us to offer things such as working extensively over in the -- in Africa, Papua New Guinea and the United States and soon to be Canada. So our ability to offer so much flexibility and so many career paths for our people, both trade-based and office-based has been a huge attraction tool to the Mader Group. And so that's allowed us to continue to grow and to continue to develop our people and give options and opportunities as we grow this business. As you can see, we've got a huge range of products and what predominantly started out as heavy-duty diesel mechanics has soon turned into auto electricians, and boilermakers and fixed plant mechanical fitters to name a few. We've been able to use that same business model to provide huge value for our customers, a variety of options and opportunities for our people and by being -- with so many customers across so many mine sites has given us opportunities to identify other areas of growth where we could use our business model to add value. And you can see on the slide there, our core mechanical services on the top there, which has also identified the need and the requirement for other stores that have helped us to implemented growth strategy, which, again, we're putting motivated, dedicated experts in their field into running these stores and growing and delivering value across the industry. The business model we have, again, it's been rolled out 20 times with 100% success rate. So we've got absolute faith in the model. We've got faith in the teams that are out there delivering this stuff, and we're able to continue to go forward, replicate that business model, apply that to other areas of opportunity and to grow our business into the successful business it is today. When we look at our method of engagement on the right-hand side of that slide, it shows the contracted versus uncontracted revenue profile of our business and that's really important. Our contracted part of the business, again, would typically involve a master framework agreement with a large owner miner, which we have an opportunity to have it annualized on 4 mechanism with zero guarantee volumes to protect any pricing downside. So if the market outruns the rates, our ability to get back in front of our customer and ensure that we're in line with market movements is there for us to have. The uncontracted part is typically our more reactive sort of workforces, very much recurring scopes of work that gives us flexibility in pricing and also gives our customers the ability to have reactive services to meet their needs, which is certainly a very popular one for us. So moving into the -- to an operational review. So again, very pleased to be able to deliver these numbers to everybody today. The highlights for FY '21, that's $304 million revenue. So break it through that $300 million revenue barrier. That's been a great achievement, up 11% from FY '20. Increase in EBITDA; $19.3 million NPAT, which is up nearly 11% from FY '20. Remaining very capital-light net debt of $23.9 million, continuing to pay around 1/3 of our profit in dividends, so $6 million declared for FY '21, which we think is a fantastic result for our shareholders with a $0.0967 earnings per share. Our recruitment focus continues to be huge. And again, we've got a fantastic team of recruitment experts that can go out and find and source and engage the best people in the business. We're giving the right people the right opportunities, and as I said before, having so many options for people to be able to choose from within the Mader Group makes us a very attractive employment prospect for the trades people we're chasing. We can put the right people in the right opportunities and ensure their career is going in the direction they want. Our investment in fleet, both in Australia and overseas, has been significant. That said, it has been all growth capital. So when we see our capital intensity rises, it's always to grow. This isn't sustaining capital, this is all growth capital. So as we're penetrating markets in North America and Canada and across Australia, we do so with our reactive vehicle-based services typically and then [ fill there ] behind that. So seeing that investment, again, is a great sign of growth for the Mader Group. And we're turning into work in Asia and Africa. So -- yes, very much controlled by the COVID situation, but we're being very selective as to where we go and who we work with, but the demand for our services is extremely strong. And we're just negotiating through those travel and COVID sort of restrictions as we return to work in those parts of the world, making sure our -- firstly and foremost, our people are safe, and then we can move them in and out as they require. So to see that rest of the world business turn on has been really pleasing. I think as an overview of our operations, you can see there the revenue split. Certainly, Australia owns the lion's share of that. U.S.A. growth has been fantastic from FY '20 to FY '21 and continuing to see a variety of green shoots there, and the rest of the world. Again, that was backed off to zero as a result of COVID and for us to be able to switch that back on and ramp that up is a great pat on the back for the international team. Certainly, our product splits as well. So as we said, working with 250-odd customers across 350-plus mine sites. Our diversity in product [ split ] has been good and continues to grow. [ Iron Ore ] being a large Western Australian-based company we're in, is obviously the lion's share of that, but the diversity across some of the other commodities, again, is very reassuring and very positive for the group. I was going to say that yes, the demand for our products across all of those commodities in all of those geographical region continues to be very strong, and we see that opportunity for growth continuing to grow. So moving into some of the other highlights here. So Australia, increasing by 11% in our revenue number there. Some areas of highlight there around our ancillary services and our infrastructure services at 21% and 24%, respectively, has been extremely positive. We continue to bolster up the management teams and the coordination teams in both of those areas as we see those becoming huge stores as we move forward. Yes, the fact that we've got nearly 100 of premises in the system, we're training up new talent. Again, most of these are very dedicated and loyal people that will continue with the Mader Group for years to come, which is fantastic to see. I'll move across to the other side, the rest of the world. Again, that number doesn't look great as far as being down by 47% revenue. But to note, that was intentionally wound off. A couple of years ago, that was around a $28 million revenue business that went down to zero in July as a result of ensuring, the safety of our people was priority. We moved those people back and redeployed them within Australia, and now they're starting to come back into the rest of the world part of the business. That half 1 to half 2 revenue is probably what's more important there and 117% growth continuing to work with some of the constraints around COVID to gradually deploy people back into the areas where it's safe to do so. And I suppose the one that we're most excited about is our North American contingent, so 75% increase in revenue growth, despite some quiet months through the COVID over there. Great to see the team be able to negotiate that and really more of a business-as-usual state there. So seeing those growth numbers back to pre-COVID levels and probably, more with some huge growth ahead of us. Working in 14 states across the U.S.A., which is fantastic, and the investment in the service vehicles, again, helps us to really penetrate the market over there, both in the U.S.A. and Canada. And I guess all the back-end work for Canada has been done now and work in Canada is imminent. So we've got people paid to go in there and commence work in the next few weeks, which is very exciting for us. So I'd like to hand over now to Paul to take us through the financials, please.

Thanks, Justin, and thanks, everyone, for joining us this morning. I'll move on to Slide 10, financial performance. And just some highlights around the profit and loss. As Justin mentioned, group revenue growth, 11% PCP and strong revenue growth in North America at 75%. Probably, more pleasing on the North American front, excluding foreign exchange movements or on a constant currency basis, that business unit or segment grew by 95% PCP, which is incredibly pleasing. North America revenue contribution consisted of 8% of group revenue. That's up from 5% in the previous financial period, which is pleasing that the size of the pie is growing and the size of the U.S. contribution is also growing with it. Strong revenue growth in the rest of world half-to-half, up 117%, which, as Justin alluded to, really demonstrates that as we return that business to normal, there is some strong growth potential there. EPS was up 11%, and our profit payout ratio was around 31%. So ensuring consistent returns to shareholders there. Moving on to the financial position, which is a pretty simple slide to run through. It is a very simple balance sheet comprised primarily of trade receivables and PPE. The net debt position stands at $23.9 million with overall net leverage at 0.7x. We talk about the level of comfort in that net debt position, and we always peg that back to an internal metric of 50% of trade receivables. If you do the math on that, we believe we have comfortable headroom in that net debt position as we grow into FY '22. We deployed $11.2 million of growth capital in FY '21. That's 100% of CapEx was all growth capital, and we're well positioned for growth in FY '22 with plenty of headroom in our unutilized debt facilities and well supported by our banks. Moving on to the cash flow on Slide 12. Delivered net cash flow from operations of $16.2 million, which was solid. Strong cash conversion at 84%. And as I alluded to on the previous slide, strong investment in growth predominantly in the U.S. and North American markets. And that was, as I said, 100% growth CapEx. It's probably enough for me before everyone falls asleep on the financials. Justin, I'll hand back to you now.

Okay. So moving on to the outlook. When we look at our geographical footprint as we stand today, our major revenue base is still in Australia. And to see that growth throughout the whole country has been fantastic to see across a variety of different commodities. The U.S. growth is definitely back to some strong numbers and some big prospects ahead of us in the U.S.A. and moving into Canada. And the rest of the world definitely back online and that's growing significantly quarter-by-quarter. So to deliver the numbers that we have with that geographical footprint without the rest of the world business to see that growth has been a real credit to the Mader team. So I want to thank you again. If we look -- moving forward, I mean, this is the one that excites me the most. When we look at Mader, it has really started to become a global business and the hard work from the team across the globe has been nothing short of extraordinary, but really puts us in a strong position to grow going forward. If we look at the RoM tonnes there, particularly in the North Americas, the opportunity to really disrupt and penetrate those markets and grow significant businesses potentially in excess of what we got here in Australia is very much there in front of us. The rest of the world, again, we're negotiating through on some of the travel restrictions, the work permit restrictions as we have in those parts of the world as everyone is in this COVID situation, but as we see that ease up and that ability to trouble become a lot free up, the demand for the products over in those parts of the world is extremely strong, and we're looking forward to servicing our customers over there. If we have a look at the group outlook and guidance. So look, in summary, we think the business is very adapted to the COVID situation. Pleasingly now, we've been in a position where even with the current lockdowns we've got across the country, people can isolate and still travel to Western Australia. Our Eastern state-based employees, those that don't want to -- we have enough work at both ends of the country so that people are able to work in their home state while lockdowns are happening before they return to a normal roster on the other side, which is something that a lot of companies cannot offer and again, makes us a very, very strong employment opportunity for those people. The diversification strategies, both geographical and service strategies continue to be really, really strong. So we're bolstering up our teams both in the field and in the office with subject matter experts in their areas of expertise to continue to grow, use the Mader business model to grow that business. And we're also looking at some different acquisition potentials being explored, as we speak. So more to come on that in the months to come. Looking into Australia, the strong commodity markets. Obviously, as everyone is well aware, we're well poised to take advantage of that. Our expert team of recruitment and coordination and management personnel are laser focused on people, making sure that the culture is strong. We get the right people. They work safely for our customers, and we earn the right to grow this business. We've got a very low customer base who we continue to support. There is still a bunch of mega projects coming online, which again with new equipment coming online, creating that maintenance requirement, puts Mader in a great position to service those opportunities. The equipment population is expanding. So again, there is a myriad of new equipment going into the industry. That said, very, very little coming out. So that is all growth potential for us with an aging population of many machines that are out in the industry at the moment, creating that maintenance debt that we can again go in and assist our customers, even servicing. And our service offering diversification. So we talked about our ancillary teams, our infrastructure maintenance teams amongst a bunch of others, both geographically and service spread as well to continue that growth. North America, again, we're seeing a huge growth potential in that part of the world. We've invested heavily in vehicles to continue penetrating that market. Our recruitment efforts over there are going very well. So we're continuing to grow at a great rate over there in the U.S. There's joint addressable markets in North America, and that Canadian entry is something we're pretty excited about, too, which is really quite imminent. The rest of the world, again, it is opening up. We have baby steps in that space, but we're moving in there as we can. Very selective and targeted reentry around who we're working for and where we're working. That said, there's some really good green shoots in that space, and we expect to see that grow this year. As conditions stabilize, we'll just continue with that selective reentry into those areas. And I suppose what most people on this call are looking for is our FY '22 guidance. So we're pretty pleased to be able to present that. So our revenue forecast in the range of $355 million to $365 million, which is up from our $304 million in FY '21 with an NPAT forecast somewhere between $23 million and $25 million, up from $19.3 million in FY '21. So we -- the team is very focused, very dedicated and looking forward to delivering those results. So we'll look forward to getting on with that. If I look at that investment case, I think we've sort of been through that, but I mean, it's a proven business model. It's something that we've got a very dedicated and highly functional management team that can get in behind, that can scale it, grow it with some expert trades in their fields of expertise. The domestic and international growth opportunities are in front of us. So we need to just continue to remain disciplined and to get the right people in the business to deliver safety for our customers, and we'll continue to earn the right to grow this business. Our low capital intensity, as Paul talked about, is a significant advantage. We invest in growth capital only essentially, and that is around our service vehicles. And yes, the teams are in a great position to continue that growth and continue to push forward and deliver some great numbers into FY '22 and onwards. So we look forward to continuing to talk through that as we move forward. So everyone, that's our presentation for today. So thank you very much for joining us. We're really pleased with our results, given a fairly strong year through the COVID situation. But again, I just want to thank the Mader team, a great group of dedicated personnel across the board who are delivering for us each day. So thank you, team, and thanks, everyone, on the call for joining us. We might just move to a few questions.

Sure. Thanks, Justin. I'll just moderate these as they come through. A question for you, Justin, from Hamish Murray from Bell Potter. U.S. EBITDA and EBIT margins look very strong. We know that to be the case. How do you expect these to evolve as you enter Canada? And can U.S. margins be maintained in the near term?

Yes. Thanks, Hamish. Good question, as always. Look, the U.S. margins, we're not seeing any reason as to why they should change. We're continuing to grow into more states working for more customers in more regions and the rates that we offer over there seem to be very, very fair and very well accepted by our customer base. So we expect to maintain those U.S. margins. Moving into Canada, we see those being somewhere between probably the Australian and the U.S. margin. So probably not quite as strong as the U.S., but certainly, a stronger margin that we see in Canada. Yes, we've got a few different regions of Canada that we're exploring at the moment, and as we move into those, we'll be able to give some more feedback as that plays out. But yes, we expect it to be somewhere in the middle.

Thanks, Justin. Another question coming through here. You talked about the service vehicle fleet. This is a question from Jason Palmer from Taylor Collison. Is it correct to say that the service vehicle fleet has a greater useful life than a depreciable life, and that therefore, the return on invested capital should continue to improve as the business expands? Can you talk about useful life of those assets and how we see that moving forward?

Yes, sure. Thanks for that question, Jason. Yes, look, absolutely. I mean we've got -- there's actually very few of our vehicles that have ever been moved out of the fleet. So some of the original vehicles are still out there, getting money for us essentially. So yes, the depreciable life is a lot shorter than the whole useful life of that vehicle. So there would be a significant portion of our fleet that is fully depreciated, but still in operation. And we continue to see that we're not -- I think as I said before in the presentation, all this capital being spent on new vehicles is all growth capital. We're not giving any out, this is a sustaining capital.

Another question from Hamish. How do we think about rest of world for FY '22? Is that upside potential? Or is that business as usual? And how do we think about that?

It's a good question, Hamish, and you might be as well poised to answer that as I am. Look, hard to say. I mean, look, the demand for the services is definitely strong. We're seeing, as the guys are getting back to normal, we're seeing a lot more free movement into places like PNG, which is positive. So definitely expecting that to grow. It has been probably a little bit challenging with the COVID situation in PNG and the ability to move people back to Australia. That seems to be getting better now. What that looks like in 3 months from now, I wish I had a crystal ball on it. But look, the demand certainly there, the workforce -- we have workforce that are really keen to go and work over there. So everything sort of lined up. So if that travel situation frees up, then we're poised to deliver likewise in Africa as well.

Thanks. Another question from Jason from Taylor Collison. What are the labor turnover rates of the business? And how do you think about that in relation to the 98 apprentices and trade-off candidates? Is that just covering the LTO? Or is that a core part of the business strategy?

Look, the apprentices are certainly a core part of our business strategy. Most of those apprentices, we intend to keep within the major business. We invest significantly in them to go through the [ tape ] and upskill and also [ buy ] them up with our experience, trades to be able to give them the right grounding and the right experience in that heavy vehicle industry. So no, look, we see that is definitely an upskilling opportunity for these people, but also a definite growth opportunity for our business as well. So we intend to as much as we can keep those apprentices and trade-ups within our business and given the long careers in the Mader Group.

A question for me from Hamish is, just talking about FY '21 EBITDA margins in Australia and the outlook for FY '22. Looks like Australian margin pressures have been offset by other income, which is the apprenticeship booster from [indiscernible]. It's nice to see some money coming back the other way. Is this related to borders and quarantine? Hamish, broadly, yes. Whilst we are -- whilst there is some cost impacts of those border closures, I must say that our workforce mobilization teams have become very adept to that, moving people east to west and housing labor in the jurisdiction in which it needs to operate. And I do believe that those margins will normalize back to -- towards 11% as the world returns to normal. Moving through -- next question from Jason, again, at Taylor Collison. Talk us through the -- we talked about Rest of World revenue assumptions, Justin -- or a little bit earlier, Justin, talk us through what are you thinking for the U.S. and Australia?

Look, the Australian market, I guess the demand on our product continues to be strong, Jason. We're certainly -- we're recruiting as hard as we can, essentially making sure that we have the right people in the right places to continue to grow. So part of that -- any restriction on growth is really sort of self-implied. I think the split -- I think we should continue to see Australia growth in line with what we've seen in previous years. So the demand is certainly there. As those product -- the diversity splits and things like our ancillary groups and our infrastructure maintenance groups certainly supply some upside to some of those growth rates as well. So we're looking forward to seeing those grow, and hopefully, there is an even better number than what we've seen previously.