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Edited Transcript of NMG.AX earnings conference call or presentation 27-Feb-20 1:00am GMT

Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of Acrow Formwork and Construction Services Ltd earnings conference call or presentation Thursday, February 27, 2020 at 1:00:00am GMT

Ladies and gentlemen, thank you for standing by, and welcome to Acrow Investor Conference. (Operator Instructions) Please note that the conference is being recorded today, Thursday, the 27th of February 2020.

I’d now like to hand over the conference to your hosts for today, Mr. Steve Boland, CEO; and Mr. Andrew Crowther, CFO. Thank you. Please go ahead.

Steven Boland, Acrow Formwork and Construction Services Limited – CEO, MD & Executive Director [2]

Thanks very much, Sean, and thank you for joining us folks today as we give you an update on how business is progressing across the FY ’20 year. This morning, we’ve released our first half results. I’m going to walk through, and then with Andrew also, the results presentation pack primarily through this session.

So just as a starting point. Clearly, another very busy 6 months, transformational 6 months in the life of Acrow. Then we’ll go through, obviously, in a lot of detail, around Uni-span, about the acquisition of Uni-span effective 1st of November. It was a very significant milestone in the business and over this period. And again, I’ll give a great degree of color around that. But so far, we’re extremely, extremely pleased with how that acquisition is moving along.

One of the other major things that happened over this period is we started the journey 2 years ago to transform ourselves to a formwork-focused business. And one of the major activities that we had to undertake was to completely exit the 2-storey house residential markets in Victoria and New South Wales that are highly fragmented, highly price-sensitive and were in decline. And that has now been completely — we’ve now completely exited those businesses, and I’ll guide you to some of the numbers that show the movement of that over this period.

So a couple of things just on our snapshot before I highlight sales contribution between different segments. We’re now 68% Formwork, 32% Scaffold. I will be talking in the scaffold area about a movement into the industrial scaffold space, which is a very lucrative part of the industry that has a similar dynamic to formwork in that it’s not price-sensitive and not a commodity style business, it’s very much service and reputation and reliability focused. And I will talk in some detail about that. The other thing I would point out just on the first part of our presentation, Page 3, is we had no lost time injuries at all in the previous 6 months, which is a tremendous result for the business.

In terms of the strategy for the business going forward, we have now added an element in here about the industrial scaffolding business. Now this is not an area that Acrow was in at all before we purchased Uni-span. We’ve now very clearly seen the opportunity that is in this segment. Uni-span do particularly well in this area and only really focused in Queensland at the moment. And we now see a strong opportunity for us to develop that business nationally.

And I’m very pleased to say that there’s already been some good-sized contract wins in the New South Wales’ industrial scaffolding space over the last couple of months. So we will be paying a high degree of attention to the growth in that area now. Again, as I said, it’s not price sensitive. It’s not like residential perimeter scaffold. You’re dealing with large industrial organizations, mines, power stations, et cetera, gas fields where when they’re doing a shutdown, they need service and they need reliability and they need quick response, and price doesn’t necessarily factor into the discussion.

Okay. So to go through the key highlights and achievements of the first 6 months of this financial year. As I mentioned, the acquisition of Uni-span took place on November 1 — effective November 1. In line with that acquisition came a renegotiation of the arrangement that Uni-span had with ULMA to be the exclusive distributor of ULMA products in Australia, and we’ve also added New Zealand to that arrangement. On the back of the opportunity, we strongly believe there is to market and sell ULMA products into the New Zealand market.

We did a capital raise in December of $5.2 million. It was very well received by the market, and we were very happy with the outcome of that. And those — the funds for that equity raise are quarantined for the use of capital, one, primarily for the equipment required for the Sun-Metals contract. But again, I’ll go into a bit of detail because it’s an absolute excellent story for our business. And also, secondly, for equipment that we will require from ULMA to service the range of civil infrastructure opportunities that are presenting themselves in New South Wales and Victoria.

The integration process of Uni-span is going extremely well. I’m happy to say that the cost-out guidance that we’ve given the market on acquisition, we are well on track to achieve. And I’ll go into more detail about some of those areas later on. We’ve actually had a very, very, very good 6 months, and especially the last few months, in terms of key contract wins. I’ve got — we’ve got a list of those — some of the key contracts later on. But just to touch on these.

Sun-Metals. I’ll go into more detail on Sun-Metals. We’ve recently made an announcement about a contract that we won for the formwork — for BKH for sale of formwork equipment onto the Barangaroo Station for the Sydney Metro. We’ve also now made a similar sale of equipment, not at the same size, but I will talk about that later on because it’s also significant. Sale of equipment onto the Cross Yarra Partnership Metro Rail joint venture in Victoria. And I’ve mentioned to you the Mount Piper shutdown, I’ve mentioned it here, is a key achievement because it’s the first combined — the first Uni-span/Acrow industrial scaffolding contract in New South Wales that’s been awarded, and we will be seeing revenue from that in sort of the May, June period. On the Natform front. Over the last 6 months, we’ve done — we’ve completed and continued to work on our first contracts in the history of Natform in both Victoria and South Australia.

In terms of the key financial stats for the period. Revenue of $38.1 million was up by 9%, and that’s despite on a half-to-half, first half this year to second half last year, a reduction of $2.8 million in 2-storey residential scaffolding in Sydney that we exited over that period. EBITDA of $5.5 million, up 15%, is absolutely in line with the guidance that we gave at our AGM that we expected results to be broadly in line with the second half of ’19, plus the acquisition of Uni-span. Contribution margin of 61.3%. NPAT, $2.4 million. Whilst being down — Andrew will go into some detail around that when we get to that point. The differences here primarily being in tax. And we’ll probably give you a fair bit of explanation around tax position now post Uni-span. Net debt of $17.5 million, up by $13.8 million, is basically exactly in line with the required funds to purchase Uni-span. And we also got a high degree of capital expenditure over this period that Andrew will walk you through. Operating cash profit of $4.4 million, and you’ll see we have announced today an interim dividend of $0.007 fully franked. So this is the first time that we’re paying a fully franked dividend.

So main themes across this period. We mentioned the revenue. We mentioned the contribution and the underlying EBITDA of $5.5 million being in line with guidance, and interim dividend and also the operating cash profit. We did — we completed that Uni-span acquisition. We have — we are getting the savings in line with what we expected, if not better. We’ve talked about ULMA. We’ve talked about Victoria, South Australia and Natform and the capital raise. So all of those items that I’ve already discussed I’ll go through in somewhat more detail getting in more of the guts of the presentation.

In terms of the market. Again, we continue to show the major transport infrastructure projects listed in all of our presentations because it continues to be highly relevant to how we’re developing the business, and especially now with the combination of Uni-span and Acrow. So all of — we are now — I would be disappointed and, in fact, would be highly surprised if we don’t have — in fact, we will definitely have an opportunity to be bidding for every single one of those major transport infrastructure projects that are on the right-hand side of that page. I think that whatever level now that we’re going to be competing with, obviously, 3 or 4 of the major formwork suppliers. But it’s fair to say pre Uni-span and certainly pre our change of focus has been pivot a couple of years ago, we were probably — I would have said we were maybe going to be on 30% of those projects. Now I can say with a high degree of confidence that there was not one major national infrastructure project that we will not be at least in the bidding for.

And just to give you a couple of examples of the way the business is now working as it always had worked well in Queensland, but now in some of the other states. One of the big projects that’s on that list there in sort of the dark green is the North East Link in Melbourne. So that’s the further freeway development in Melbourne that will link the Monash Freeway and the Eastern Freeway that will take place sort of from ’22, ’23 onwards. We are already working with the joint venture for that project on specifying our equipment onto that job. We’re spending a lot of engineering time already for something that’s probably 12 to 18 months away. So that’s sort of now has dramatically changed from where we were 2 years ago, both in Victoria and New South Wales, where we weren’t really in that game. We are now very much up to our eyeballs in that game.

On Page 11 of the presentation across the markets. A little bit has changed in the last 6 months, but not a lot. Queensland civil, we believe, and certainly from our outlook, Queensland civil is quite stable at the moment. We’ve actually had some very reasonable contract wins in that space over the last 6 months. New South Wales has probably gone from good to stable. But within probably — but probably in the next 6 to 12 months, it will go back to good. There are a number of big projects that are about to get on the ground. One of the biggest ones, for those of you from Sydney, is the further WestConnex development at the Rozelle Interchange. I mean if you drive — if you go through that area around Rozelle and Balmain, you’ll see all the work that’s undertaken there. That’s a massive part of that project, and that’s due to start construction, and we will see some revenues from that in the next 3 to 6 months.

So really, in terms of softness, we continue to be soft in residential in Queensland and New South Wales. We’re seeing signs of improvement in Victoria, certainly. And we’ve got stable markets in the rest. But certainly, New South Wales and Queensland have not picked up in residential at this stage.

In terms of sales wins and pipeline. We’ve now got a combined pipeline of Acrow, Natform and Uni-span altogether. Our pipeline is at record levels with $63.4 million worth of revenue in that pipeline, potential hire revenue as at December ’19. Our contract wins first half ’20 compared to second half ’19 was up 34%. I know internally in the business, we have integrated the Uni-span and Acrow sales teams extremely well. It was done very quickly, and there is — they are basically now completely working together as one unit across all of the range of products that we now have to offer. So we are — I feel like we’re in very good shape in that area.

Going into the sort of the half-on-half profit and cost and revenue numbers. We have gone up from the second half of ’19, $4.8 million underlying EBITDA to $5.5 million. I will point out shortly when I go into the detailed segment breakdown that, that improvement of $700,000, which is pretty much exactly the contribution of Uni-span over those 2 months is despite a reduction of $1 million of profit half-on-half out of the 2-storey house residential business in Sydney we have now exited. I will go in some more detail about that because that was over — from where it was 2 years ago, was in decline. Margins were declining, price was becoming an absolute — the only driving factor, and frankly, we couldn’t have now done what we’re doing with Uni-span with getting amalgamations and cost-outs if we had maintained that business. So the transformation that we started is now complete in that area.

In terms of expenses. One thing I will point out that sort of might look a bit funny, but I will point out because its effect at the moment is in the overhead expenses where the other overheads look like — well, they show here as being up by $900,000 half-on-half. Actually a very, very big factor here, probably more than $0.5 million of categorization of Uni-span expenses that we’re still working through. The previous way that Uni-span characterized their expenses to the way we do, we’re still working through that. So there’s an overestimation of the cost in that area and an underestimation in yard-related expenses. Because, as you can see, the yard-related expenses only show an increase of a couple of hundred thousand dollars, whereas the Uni-span yard costs actually cost around about $300-odd thousand a month. So that’s — there’s an understatement and an overstatement across those 2 lines.

The other factor half-on-half is that we go into the second half of the year when we do all our reconciliations and things like bad debts, et cetera, for the end of the financial year. We don’t do it at the half year. We do that all at the end of the financial year. Second half ’19, we had some write-backs of provisions that are fairly standard when you’re doing that final full year balance sheet reviews. We don’t do that at the half year and we do that for the full year.

Into the divisional results. Formwork, now with the combined group. One of the major things that will stand out here is now the high revenue volume and opportunity in product sales. I’m going to talk quite a great degree about this today, especially as it relates to what we — what Acrow has already learned now from Uni-span. But broadly, from a hire revenue perspective, whilst the number is relatively flat, Natform’s revenue was down period-to-period, offset by 2 months of Uni-span. So we’re not talking massive numbers here. Acrow’s numbers were for the period flat. Natform’s were down by a couple of hundred thousand and made up by a couple of hundred thousand in the form of revenue into Uni-span at the hire revenue line.

But as I said, the big change is in product sales going from $1.8 million in revenue to $4 million and going from $980,000 in contribution to $2.3 million. That’s basically the offset to the reduction in the residential business. Again, I’m going to talk about that in a fairly great detail because it now becomes a very, very big focus in our business going forward. And again, it is something we had to learn off the back of the Uni-span acquisition, the opportunity for this particular area of selling new products presents to the business.

We’ve had some very sizable contract wins in all 3 of the major states, Queensland, New South Wales and Victoria. Sun-Metals, as an example, where that revenue will be — sort of 80% of that revenue will be recognized in the second half of this year and a small component of it was recognized in the first half. So that will contribute a significant increase in formwork hire revenue into the second half of this financial year. Contribution margin, 73%. It’s a very, very good business. You’re not doing 73% in Scaffold.

Turning to Scaffold. You can see what I was talking about in terms of the residential sector. $3.3 million has reduced to $500,000 in revenue. It’s now 0, as I sit here today. And $1.2 million in contribution is reduced to $200,000. So we’ve now — I’m not — that was a very profitable business to the old Acrow over a long period of time. But we clearly annunciated our desire to exit that business over a 12- to 18-month period, and we’ve now fully exited it. And that used to make us $2 million or $3 million a year back — if I get back 3 or 4 years into Acrow. And that’s now being replaced by formwork revenue that’s far better quality of earnings.

The actual pure scaffold hire revenue, you can see, has improved. It’s basically almost back to where it was in the first half of last year. And that’s primarily in — outside of New South Wales. So in all of the other markets outside of New South Wales plus a couple of months contribution of Uni-span, who do have a bit of scaffold commercial, scaffold hire in their Queensland business.

And you see, we’ve added in a new sector here called Industrial Scaffold. You will be seeing this in all future releases from Acrow because it’s a very strong part of the business. As you can see, in only the 2 months that we’ve owned Uni-span, there was $1.5 million of revenue and $870,000 of sales contribution from that part of that business. It’s currently, by far, the most profitable part of Uni-span. And I’ve seen in action the way that those — our guys work in that sector now, and I’m incredibly impressed with how we operate that sector. We’ve got a fantastic reputation in Queensland, and I believe we’ve got a tremendous opportunity to grow that business nationally. And as I said, we’ve already won one significant contract in New South Wales, with the second one pending. That will be recognized also, I think, within this financial year.

Going to the Uni-span acquisition in a bit more detail. So we purchased the business on October ’19, we paid $21.2 million pre-earnouts, 4.4 based on the normalized ’19 EBITDA. We talked about who they are and what they do. So the ULMA side on formwork, coupled with the Industrial Scaffold business. And then if you throw in the product sales business, it’s a very, very good complementary business to Acrow. ULMA, we’ve added New Zealand. Very impressed with the quality of the staff in Uni-span. There are some people in that business that are absolutely first class and almost to a person. I think — I think — and I think I’m very, really happy with the way the teams have integrated with tremendous amount of cooperation. We’ve got all of the people together. We bought that business in November. In the first week of December, we got the whole sales and engineering teams for all the business together for a 2-day conference. And the degree of cooperation and spirit amongst that group is absolutely fantastic. So very pleased with how that’s developed and how that’s going. And we are well on track to achieve our annualized integration benefits. And on the next page, we go into some detail in relation to that.

So firstly, on the revenue side, there are the joint contract wins of Sun-Metals, CYP Metro Rail Melbourne and Sydney Metro Rail. They are all — there’s all work that we have generated now at a very significant level in civil infrastructure projects via a combination of both Acrow and Uni-span. There are other markets that we are expanding Uni-span into. Victoria in civil. They had started to look at working in Victoria in civil at the time that we had — that we purchased the business. We are now generating very good solid revenue within the space of 2 or 3 months in that market in Victoria, where the Uni-span/ULMA products have been very well regarded.

I’ve mentioned a bit about New South Wales Industrial. There’s absolutely no reason why we can’t also expand that business into the other major states. There are big industrial markets in Victoria, South Australia and Western Australia as well. And an interesting one, just there on South Australian scaffold, is that the Uni-span scaffold material is different style used at Acrow, and there is very strong dry hire market for that particular style of scaffold in the Commercial/Residential sector in South Australia. And we’re opening up that market now. I mean that might be a $0.5 million a year market that we previously weren’t playing in, and we’re already winning contracts. We’ve probably already got $25,000 or $30,000 a month of revenue coming out of that space.

And then just in terms of the general products, the cross-sell, and as I said, the increased product sales focus. I’ll talk a bit about that product sales area now and what that now means for us compared to the old Acrow. So Acrow really didn’t — we weren’t really tuned into the opportunity to sell our products into primarily formworkers. Number one, we didn’t have the ULMA-style relationships. So we didn’t really have a great suite of products that were sort of market leading, whereas we clearly now do with the ULMA recruitment. But Uni-span has very well, over a period of time, sold their material to formworkers who want to buy rather than hire. And then once they’re tied into using your system, then they cross-hire as they need to top up. And that’s something they’ve done really well, and so my eyes have been really opened up for that opportunity. And I expect that product sales going forward will almost become as important to Acrow’s earnings as hire revenue is.

And a couple of the larger contracts that we’ve won. We’ve put in the ads around — about the Barangaroo contract with BKH. Good margins on that. We’ve made — we’ve got a sale into the Cross Yarra Partnership in Victoria of ULMA product. It’s a $500-odd thousand sale with a very, very healthy margin to it. There are a number of these sorts of opportunities that we are now tracking. We now have a tracking process, CRM tracking process, to really have a look at this. Clearly, it means that on a month-to-month basis, our earnings will be lumpier than what they were previously. And that’s the way also the month-to-month forecasting now looks. And I’ll give you an example of the sort of thing that happens. So just yesterday, in our Queensland business, we sold — we made a sale yesterday that wasn’t on anyone’s forecast, really. There was a discussion going on, but we hadn’t really had this on our radar. But we made a sale yesterday for $670,000 with a 30% margin, just yesterday. So there’s a couple of hundred thousand dollars of profit being generated for us yesterday that sort of — in these product sales here that sort of come out of the blue. So we are now really focused on a national approach to product sales that we think will open up this opportunity even further that traditionally Uni-span’s only focused on Queensland.

In terms of the cost-outs. The business did a fantastic job to get out of the old Uni-span’s Yatala in 2 months. So we got — we are — from the acquisition date to basically the end of December, we were able to completely exit that yard and consolidate it with one of our other Queensland yards and take out the associated Revesby and other overhead expenses in relation to that yard.

If I sort of chip across over to the next page, talk about depots. We will be departing the Huntingwood depot in New South Wales at the end of this month. So same again, we’ve gone through the process of reallocating all of the equipment out of Huntingwood into our Revesby depot in Sydney and again shutting that depot down with all the associated costs.

In terms of headcount. There was an initial reduction in headcount in the areas of management, sales engineering and obviously, some of the staff in the depots. The next element for us is the old Uni-span head office that obviously operated as a corporate office for that business. We will be pretty much shutting that down and integrating all of the Uni-span accounting and operational systems into Acrow end of March, sort of mid-April, sort of end of April at the very latest. So there’ll be a reduction further off the back of that. And then although that was shared services that we talked about in IT insurance, we’ve just now recognized in the last couple of weeks a pretty significant savings by combining insurances, general overheads. And this group buying one is one that’s also very strong. And we probably didn’t see it as enough, but we — when you combine the Uni-span and Acrow buying requirements for equipment, we are seeing that we are getting, one, reduced prices; and secondly, it looks like at the moment, certainly, our maintenance CapEx requirement has — certainly for the short term here, has reduced reasonably significantly.

Key contract wins. Some really good ones over the last period of time. So Sun-Metals we announced last year when we made the acquisition of Uni-span. We announced a $2.7 million contract. We are now up to in excess of $4 million of revenue that will be generated from work that we’ve got on that site. I visited that site 2 weeks ago. And I would suggest to you that the Sun-Metals-Townsville job will be on the front page of annual reports, et cetera, as we go forward for the next 12 months, it’s a fantastic site for us.

We’ve got a range of services that we’re now providing on that site, not just the original $2.7 million contract that we won. We’ve got a range of different types of equipment. We’ve got some through the Uni-span industrial business, we’ve got some labor that we’ve got deployed on the site, making good profits for us. We’re working directly with the main builder Westpac as well as a range of their subcontractors. So it’s going to be a great site, a great job for us, and a great revenue and profit earner over at least the next probably 12 months.

Sydney Barangaroo, I mentioned with BKH. That sale of equipment is not the total requirement of equipment for that site. So as time goes up over the next few months, we expect there to be a further order of both hire and potentially a further sale of equipment onto that job in the next 3 to 6 months.

Queens Wharf in Brisbane has now really started to get out of the ground. We are supplying scaffolding to that job now. And our conservative estimate is we’ll get around $500,000 a year of revenue out of that for the next 3 years.

Whilst other parts of Queensland civil appear to be soft, we’ve got a $1.2 million job going up in Mackay at the moment with CPB Contractors, generating about $100,000 a month of revenue.

Melbourne Metro Rail. I mentioned that the sale of equipment to the Metro Rail joint venture of ULMA equipment will be supplied in April of this year.

Opera Residences. We refer to it there because it’s a contract with Richard Crookes, where it’s a totally integrated contract where we’re providing access scaffold, propping scaffold and Natform screens all for the one job.

Tugan Airport. Large draw of hire job in Queensland, and I refer to the Palladium Apartments in Melbourne because it’s a large Natform contract, one of the first contracts we won in the Victorian market.

So overall, certainly, this next 6 months, and I’ll go into more detail at the end with our forecast. We are very confident of significantly improved results for this next 6 months off the back of a range of areas. And I said, I’ll go in more detail on those at the end.

So I’ll hand over to Andrew now to run you through the financials in more detail.

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Andrew Crowther, Acrow Formwork and Construction Services Limited – Group CFO [3]

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Great. Thanks, Steve, and thank you. So I’ll take you through on Slide 21. I’ll take you through the profit and loss statement going from sales and down essentially to the reported NPAT because obviously, there’s a few swings and roundabouts that we’ll go through. So just to reiterate, this is done on a pre-IFRS 16 point of view. So it’s very comparable to the previous half years.

So from a sales point of view, sales were up 9% on the previous half. And as Steve mentioned, that includes the 2 months contribution from Uni-span. So sales contribution was up 11% from $20.9 million to $23 million, $23 million including Uni-span. The contribution margin was an increase from 59.9% to 61.3%, and that obviously reflects partly the higher margin mix of formwork. Then from an EBITDA point of view from the previous half, $4.8 million to $5.5 million. So there’s — that was an increase. It included an increase in EBITDA margin from 13.7% to 14.6%.

Now that then translates — the $5.5 million translates to an NPAT underlying down to $2.377 million. Yes, that was a reduction from $3.189 million from the previous 6 months. Now there’s a few things that impacts this number. And the obvious one is depreciation, interest and tax. Now I’ll go through each one of these in turn. Depreciation had increased from $1.8 million to $2.2 million, so approximately a $400,000 increase in depreciation. Now there’s 2 main impacts on this, which is quite obvious. There’s the large capital expenditure we did in the second half of last year and also leading into this 6 months. So the extra depreciation comes from that. And there’s obviously the acquisition of Uni-span. We got an extra $25 million of plant and equipment. And that in itself has 2 months of depreciation. So $400,000 was from CapEx in Uni-span.

Now interest. Interest has increased from $77,000 in the previous 6 months to $520,000 in the current 6 months. Now if you actually have a look at it, our debt, so not our net debt but our actual debt itself, at the end of 30 June was $6.9 million. At the end of the current period is $23.6 million. So at the end of the previous period, we had about $1 million in our equipment finance facility. And at the end of December, we had roughly just under $5 million. So that’s $4 million of debt itself. When we acquired the Uni-span business, we took on $13.75 million of debt. That was at the end of October. So there’s 2 months of interest cost there as well.

Now there was also, in the previous 6 months, there was a little bit of a timing gap as well. So between the first half and the second half of the year. What you’ll see is it’s worth pointing out, in the first half of last year, you’ll see there’s a net interest amount of $646,000 which is definitely — even though we’re not going between the first half of last year and the first half of this year, it’s worth pointing out that large amount. There was a very large refinancing amount went through in the first half of last year from the previous finance structure.

So basically, our debt has moved up, and this is all part of the restructure of the business, the investment in the future growth, both from a CapEx point of view and an acquisition point of view.

Now from a tax expense, you’ll see that — and it’s worth going through all 3 halves for the tax expense. The first — last year in the first half, we had a $323,000 tax expense and that was all from Natform. We acquired the Natform business, which was a practical (inaudible) and taxpaying business. There was a conservative view on what the tax expense would be there whilst the integration is occurring. In the second half of the year, during the true-up of this tax, there was — basically what have been seen, there was too much tax taken out. So there was a release of that.

Now in the current half year, the tax expense, the $459,000, is almost entirely related to Uni-span. Now Uni-span is a tax paying entity and it will continue being a tax paying entity. And as you know, in the past, most of Acrow’s business has been — we’ve had tax losses carried forward on the Acrow business. And therefore, Acrow itself didn’t have tax expenses, it didn’t have tax payable. So the business is changing. Uni-span is a tax paying business and, as such, will also have tax expenses. And also, Natform is a taxpaying business and will have a certain amount of tax expense. Now the $459,000 is based on our initial conservative view of what the tax on Uni-span’s profits for the 2 months is plus the 6 months of Natform. However, what we’ll probably find in the next 6 months is there will be some sort of a true-up as we go through and firm up the Uni-span business and fully integrate it into Acrow. So if you look in the half-to-half, yes, it appears there is a $700-odd increase in tax. But the reality is, it’s probably more like a $400,000 increase in tax if you took into account a smoothing of the Natform tax in the previous 6 months.

So NPAT underlying, $3.2 million, down to $2.3 million. And then after significant items, both of which related to other than Natform and the Uni-span acquisition costs and other one-off in share-based payments, we have NPAT reported of $1.6 million, down to $0.6 million. Now remember, that $0.6 million actually is the pre-IFRS NPAT. If you then — the impact of IFRS was about $237,000 negative. So if you take that off, the $617,000 pre-IFRS comes down to the financial statements of $380,000.

Also, so going to that as well. Underlying NPAT of $2.3 million. As Steve mentioned before, we have announced an interim dividend of $0.007 per share fully franked. So this is in line with our previous 2 dividends of $0.01 on an after-tax basis. So it will be a $0.007 cash and a $0.003 franking credit. And that’s in line with the fact that we’re paying tax now from Natform and Uni-span. And in fact, that Uni-span actually does have — Uni-span and Natform do have carryforward franking credits.

Now I’ll move you over now to the balance sheet on the next slide. Just to confuse things, this includes AASB 16 and it reflects the balance sheet on the actual P&L — balance sheet and the financial statements themselves. So the big change on the balance sheet — there’s 2 big changes in the balance sheet from 30 June 2019 to 31st December, which is AASB 16 itself and the adoption of — and the acquisition of Uni-span.

So I’ll just — I’ll do the IFRS 16 thing first. If you look at the assets, we have a — what is now called a right-of-use asset of $16 million. Now that’s basically going to — that will basically amortize on a straight-line basis over the period of the current leases we have. That wasn’t there last year. And we also have a lease liability balance of $17.1 million, and that reflects essentially the discounted payments in the future of the lease payments we’ll be making.

So that — and if you look at the actual financial statements themselves, the right-of-use asset depreciation goes through the depreciation expense and the lease liability — interest on the lease liability goes to the finance expenses. So as you would have seen from other clients and investors — investments, the P&L is starting to become a bit hard to understand.

Now on top of that, we had the Uni-span acquisition. So you’ll see that property, plant and equipment from the Uni-span acquisition has increased by around $25 million, plus we’ve had the CapEx from the current year. Working capital, we had receivables from Uni-span went up, trade credits went up and inventory went up by about $2 million from Uni-span. This is — what we’ve taken up in Uni-span at the moment is the interim acquisition. This will be trued up in June as well. But at this point in time, there’s neither goodwill nor any sort of bargain purchase price. So essentially, a fair value of Uni-span is what we essentially have paid for it.

Now what’s also worth pointing out on the balance sheet is in other payables. You’ll see that’s gone from $4.4 million to $7.1 million. That reflects both the deferred acquisition costs of Uni-span of $5 million or discounted $5 million less the first deferred payment for Natform we made of $2.25 million.

Now also, you’ll notice on the balance sheet, which I think I mentioned before, the loans and borrowings have gone from $7 million to $23 million. That increase is almost entirely the Uni-span 13.7 — the $13 million acquisition line facility we got, plus the increase in equipment finance. But importantly, our net cash/debt has gone from $3.6 million at the end of June to $17.4 million in December. So our gearing has gone from 7% to 24%. However, this will start declining relatively fast because the $13.75 million at the facility we have for Uni-span is paid down over 4 years, essentially $290,000 per month. So that will start coming down. And as we mentioned before, this increase in debt has basically been setting us up for the growth in the future. So from a CapEx point view and the acquisition point of view.

Now I’ll move over to Slide 23, which is our cash flow. As we’ve gone through before, the way we look at actual operating and cash profit and from what we pay our dividends out of is essentially underlying EBITDA less our maintenance capital, basically to keep our current fleet. So our operating cash profit for the current 6 months was $4.4 million, and that’s what we’re comparing our dividend of approximately — of the $0.007 plus franking credit. Now our cash flow from operations was $5.9 million. And how this is calculated is essentially our cash per — our statutory cash of $4.3 million in cash flow plus our property, plant and equipment, ex hire sales of $1.6 million. So the way we look at ex hire sales is just part of our business and operations. So our cash flow from operations is $5.9 million.

Now our capital expenditure, which we’ll get on to the next page, was $4.9 million. That was split between growth CapEx of $3.8 million and maintenance CapEx of $1.1 million. Now I might just bring you down to the cash flow bridge. As mentioned before, we started the year at $3.7 million of net debt. We’ve had $5.9 million of cash flow from operations, which was essentially our statutory cash flow from operations plus our excise sales. We then had lease payments. So this is non-IFRS 16, our actual lease payments of $2.3 million.

We then get on to essentially our growth phase. We had CapEx of — we used the cash for $4.9 million of CapEx and $12.9 million for the acquisition of Uni-span. We also made our first deferred payment of — for Natform of $2.25 million. Now we’ve raised $4.9 million — net $4.9 million, which was the 4.2 — $5.2 million less cost. And that, let’s call it, $5 million, that has been quarantined, as Steve mentioned before, for the CapEx that will be required in the next 6 months. We then used certain cash for — operating cash for dividend payments, cash payments of $1.4 million. And then, basically, we ended the 6 months at $17.5 million net debt.

Now on to the next page, our capital expenditure. So this graph just basically splits out the maintenance CapEx and growth CapEx. So you’ll see that in this 6 months, we had $4.9 million of CapEx. And as mentioned before, $1.1 million is maintenance. When you look year-by-year, we have an average of about $2.1 million. So we’re pretty much in order of that for 6 months. Now one important thing to point out, when we bought the Uni-span business, their fleet was actually quite a bit newer than ours. So maintenance CapEx from their point of view is probably going to be less, but we’re still getting under that.

Now importantly as well, the growth CapEx that we’ve definitely done from the previous year and from this year are meeting the expected returns that we expect. Now the CapEx for the first half, a lot of the CapEx was based on Uni-span fleet rebalancing, and we also invested into basically public access, stairs and handrails. So that’s something we did in Spring Carnival, that took about $800,000 of CapEx. And plus, as you can see in the presentation, other sort of increases in our base fleet.

Now the growth CapEx, as I mentioned in the previous slide, for the second half of 2019 is going to be at least $5 million. And because we will allocate and spend that money that we raised in the capital raise for growth in the future. And a lot of that will be the Sun-Metals contract, but there’ll also be needs from — after we acquired the Uni-span business and ULMA.

And with that, I will hand over back to Steve.

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Steven Boland, Acrow Formwork and Construction Services Limited – CEO, MD & Executive Director [4]

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Okay. Thanks, Andrew. So in terms of the outlook for the rest of this year, we started the third quarter slightly better run rate than we did the previous third quarter in ’19, plus the Uni-span contributions. We gave guidance at the ’19 AGM that we expected a significantly stronger second half of ’20 compared to the first half. We reiterate that guidance. There are major points that will point to that. Clearly, we’ve got 6 months of Uni-span earnings, and now we’re going to see the first round of cost-outs, the Yatala depot closure and the Huntingwood depot closure as examples of.

We are seeing much stronger results from Natform in the second 6 months to the first 6 months with the Victoria market expansion and actually some very good new contracts in New South Wales that have been secured that are forecast to start quarter 4. Clearly, the profit contributions from both Sun-Metals and Barangaroo that we’ve announced, where 95% of the profit for those 2 jobs will be recognized in quarter — in the second half of ’20. The continued growth in both Victorian and New South Wales civil infrastructure, the CYP contract in Melbourne is a strong example of that. And now we will start to see some additional revenues in Uni-span coming out of — out in Industrial Scaffolding in New South Wales. So there is a reasonable amount of revenue in the hundreds of thousands of dollars that we will see that we didn’t have in the first half and Uni-span haven’t had in the past off the back of that growth.

We were aware of previous broker forecast range and we’re comfortable with those forecasts at this stage. Our pipeline is at record levels, 35% up, and sort of certainly, whilst there’s still — with these major civil projects, some delay. And yes, there’s been a bit of stuff going on around about the tunnel and the West Gate bridge — under the West Gate in Melbourne for example. None of those things excite us in terms of negatively excite us. The picture has never been brighter. And we are definitely now seeing the fruits coming through for the labor in the last 2 years in positioning ourselves in that space.

Our priorities for the next — at least the next 6 months and beyond. Talk about the — continue with the Uni-span integration with the closure of Huntingwood and the consolidation of their head office and shared services into Acrow, pursuing the new clients and market opportunities that are coming in front of us now with Uni-span and Natform in these new sectors. I’ve mentioned a few times, the product sales focus, it is our really strong focus and will be a very strong contributor to the Acrow store going forward.

The consolidation of the IT systems between Acrow and Uni-span. The continued development of our engineering capability, which with the advent of Uni-span into our business with Natform and Acrow, is the absolute competitive strength of this business, even more than it was 6 months ago. There’s no doubt that we are a long way ahead of our competitors in terms of engineering capability and ability to service customers’ needs from a flexible outcomes sort of basis. And that continues to be a strong focus, as does continuing high-caliber industry professionals into Acrow. That continues at a pace.

We are — I’ve been with the business now 7 years, and I’ve never seen more industry people tapping us and wanting to see that there’s an opportunity for careers in Acrow. I just didn’t see this 3 years ago. And now, I see it on a regular basis. And we’re making some — we will be making some more appointments to more industry experienced people.

And finally, to continue to target the organic growth opportunities across the states and really cross-sell the products between the 3 businesses. We’re now very proud of the fact that we’ve got a brand that we’ll be putting out there in the market, that is the Acrow Group of Companies, of which Acrow Formwork and Scaffolding, Natform and Uni-span are members of the Acrow Group of Companies. So that’s the way we’re positioning our brand out there. We believe there’s incredibly strong brand recognition and strength in both — in all 3 of those brands, but certainly, in Natform and Uni-span that we don’t want to lose.

And we’ve done a lot of work with our customers over the last few months to sort of understand how they see all of that. And we think the service attitude and delivery of service between all the businesses is absolutely complementary. So we’re very, very conscious of not losing the brand strength that — to the whole 3 companies. And so, as I said, we’re going to be — we’re marketing and branding ourselves as the Acrow Group of Companies.

I think that’s all for the presentation at the moment. So Sean, I’ll hand over for any questions that may have come out of this.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Alex Lu from Morgans Financial.

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Alexander Lu, Morgans Financial Limited, Research Division – Analyst [2]

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Steve, Andrew, just a few questions for me. Maybe I’ll just start off with the Industrial Scaffold business. That’s heavy Queensland at the moment. I think you won a contract in New South Wales. Just wondering how you want to expand that nationally, but how — which states get priority. And over what time frame do you expect that expansion to take place?

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Steven Boland, Acrow Formwork and Construction Services Limited – CEO, MD & Executive Director [3]

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Okay. Thanks, Alex. So we’re absolutely focusing on New South Wales right now. And it’s — our big focus is actually around the sort of Hunter Valley power station market. So now Piper, we won a contract there. We expect to win another contract at Bayswater. And so that’s our first focus.

We actually have a business proposition that has been given to us by a couple of guys with industry experience in this sector who have come from a potentially — who have previously worked for a competitor, and now they’re coming to us and saying we can help you grow your business in South Australia and Western Australia. It’s interesting. We haven’t decided to take that up or not. But, look, to answer your question, yes, we’ve got really good market penetration in this market in Queensland. This is a big market in the country that we previously didn’t play in. This is a few hundred million dollar market. And I think we will see good inroads in New South Wales this year.

As part of our overall strategic plan, we’ll be putting together a plan. It’ll be — sorry, we were putting together a plan to grow it nationally. But by the nature of these contracts, you don’t win them overnight. They’re sort of 3- to 5-year long-term contracts. These are very different to normal scaffold. This is you get awarded that 3-year contract and then you’re the supplier for that period. And it’s you got to have ISO accreditation. You’ve got to be able to tick all the safety boxes. Your equipment’s got to be absolutely fit for purpose. It’s more like formwork.

So I’ve got no doubt we will grow this business nationally. And certainly, we’ll see revenues in New South Wales we are seeing about to start. But I think we — there is definitely a national market there for us. We have an expertise, a bit like we always did with formworking in Queensland, it works. And the Uni-span model in Queensland clearly works. There’s no reason why we can’t grow that business nationally using that same model.

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Alexander Lu, Morgans Financial Limited, Research Division – Analyst [4]

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And is there a lot of competition in that market, Steve? Is it your traditional scaffold competitors in that industrial — or sorry, your traditional residential scaffold competitor in that industrial market? Or are you coming up against different competitors there?

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Steven Boland, Acrow Formwork and Construction Services Limited – CEO, MD & Executive Director [5]

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Yes. The only major scaffold company who cross over, I think, in both the residential and industrial is Waco. So they — yes, so they are — as well as doing a large residential scaffold, perimeter scaffolding company, they’ve got a reasonable business in industrial. But most of the other players just focus on the industrial market.

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Alexander Lu, Morgans Financial Limited, Research Division – Analyst [6]

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Okay. And just another question on the project pipeline. You mentioned that remains very strong. But can you just talk about where the strength is in which sector? Is it still roads — is it roads, bridges, tunnels or the more — still the metro train stations and things like that?

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Steven Boland, Acrow Formwork and Construction Services Limited – CEO, MD & Executive Director [7]

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Well, it’s across all those. I mean — listen, today, it’s actually the metro in Sydney and the metro in Melbourne as we sit here today. They are the 2 biggest civil activities going on. The West Gate is still — West Gate distributor is still cranking a lot, although a bit slower, because of this contaminated soil issue in the tunnel. But that’s — again, I’m not worried about that because it’s still going to go ahead. It’s just a bit of political positioning going on around that at the moment.

The other — obviously, there’s the Cross River Rail project in Brisbane that will kick off — just sort of kicking off now. That’s another major rail project. And then you’ve got this road — the road project, as I mentioned, the WestConnex Rozelle Interchange. You’ve got the North East distributor in Melbourne. You’ve got some other work in some of the regional centers in Queensland, some other work similar to what we’ve done in Mackay recently.

There’s a lot of — it’s the pipeline. It’s there. And you maybe saw it in our presentation. That remains there. But the other area that’s opened up for us and we’ve now got a very strong hold is mining. And I’m not talking WA mining, we’re talking about Queensland, like Sun-Metals, Carmichael and a couple of other opportunities in Queensland as well. So I still remain very focused on the civil infrastructure market. The business remains very focused on this. And from where we were 2 years ago in terms of our exposure to that — to those markets to where we are today is [top choice].

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Operator [8]

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(Operator Instructions) There appears to be no further questions in the queue. I’ll now hand back to the speakers. Please continue.

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Steven Boland, Acrow Formwork and Construction Services Limited – CEO, MD & Executive Director [9]

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Okay. Thank you for joining us today. If there are no further questions, then we’ll wrap up. And again, thank you for your time. And we look forward to presenting in the next 6 months with the full year of Uni-span and a few other things under our belt. So thanks for your time today, and enjoy the rest of your day.

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Operator [10]

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That does conclude the conference for today. Thank you for your participation. You may all disconnect.

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