Please find attached Presenters Notes for the Presentation of Results for the financial half-year ended 31 December 2017.

Transcription

1 21 February 2018 Company Announcements Office Australian Securities Exchange Limited Level 6, 20 Bridge Street Sydney NSW 2000 By electronic lodgment Total Pages: 12 (including covering letter) Dear Sir / Madam HALF-YEAR RESULTS PRESENTERS NOTES Please find attached Presenters Notes for the Presentation of Results for the financial half-year ended 31 December Yours faithfully Warren Coatsworth Company Secretary Seven Group Holdings Limited ABN Pirrama Road Pyrmont NSW 2009 Australia Postal Address: PO Box 777 Pyrmont NSW 2009 Australia Telephone Facsimile

2 Results Release Half-Year Ended 31 December 2017 Slide 1 Ryan Stokes Opening Slide Good morning and welcome to the Seven Group Holdings results presentation for the half-year ended 31 December I am Ryan Stokes, CEO and Managing Director. With me today is Richard Richards, Group CFO, who will present the financial results for the period. Slide 2 Ryan Stokes Disclaimer This is our standard disclaimer. On to slide 3. Slide 3 Ryan Stokes People: Safety and Culture People and their safety are important to our business. We have made significant strides over the years to enhance our safety culture, through various initiatives at WesTrac, the DuPont safety program in Coates Hire, and the inclusion of safety as a key metric in our management KPIs. But we also recognise there is more to be done and are actively working to address our safety performance through programs that specifically focus on our culture with safety at its core. On to slide 4. Slide 4 Ryan Stokes Group Overview: Our Businesses Here we show a proportional representation of the Group today, with a simplified structure that is focused on Industrial Services in Australia. The majority of the Group s earnings and asset value are attributable to WesTrac and Coates Hire, two businesses that are leaders in their respective markets and strong cash flow generators. We are pleased with the recent transactions and how the Group and our businesses have performed. 1

3 The sale of WesTrac China for $535 million was value accretive, recognising the effort of the Group, and was well timed to enable us to effectively redeploy capital. We transformed the business into a high performing dealership, reflecting our ability to drive performance through operational efficiency and persistent focus on margins and cash flow. Execution was also critical in our ability to close the transaction and repatriate the cash. We completed the acquisition of the remaining 53.3 per cent interest in Coates Hire for $487 million, net of cash acquired. The business is a good strategic fit for the Group, providing additional exposure to the growing infrastructure sector, and a compelling financial opportunity based on earnings and cash flow per share accretion. Importantly it also provides us a platform for further growth. We invested a further $118 million into Beach Energy through the equity placement and sub-underwrite that supported Beach s acquisition of Lattice. This provides the Group with additional exposure to the East Coast gas market and new exposure to the WA domestic gas market. Our active Board role and financial support for the deal has captured value for SGH shareholders, and we have increased our ownership stake to 25.6 per cent. The key takeaway from this slide is the alignment of the Group s major businesses with three strong market thematics: 1. the mining production cycle; 2. the growing infrastructure investment in road and rail projects; and 3: the Australian energy market. On to Slide 5. Slide 5 Ryan Stokes Group Overview: Highlights We achieved underlying EBIT from continuing operations of $224 million for the half, which is up 42 per cent on the prior comparative period and ahead of earlier guidance. On a pro-forma basis, if we adjust the prior comparative period for the 100 per cent ownership of Coates Hire and the increased stake in Beach, the EBIT result reflects a 23 per cent increase. Underlying NPAT was up 81 per cent on the prior comparative period. Statutory net profit of $169 million was materially in line with the underlying result. The result demonstrates the solid performance of our Industrial Services businesses. WesTrac s EBIT was up 35 per cent on the prior comparative period, and Coates Hire was up 15 per cent on a pro-forma basis. In WesTrac, product support revenue grew by 10 per cent, which together with 36 per cent growth in product sales, resulted in overall revenue growth of 16 per cent for the period. 2

4 The mining production cycle continues to provide opportunities mining fleets continue to work harder and are ageing. Component rebuild volumes are increasing and we are working closely with our customers to support their operations. The equity placement and share purchase plan raised $385 million, strengthening the balance sheet and demonstrating strong support from new and existing institutional shareholders. The placement also expanded our free float, increased liquidity in our shares and enhanced the investment quality of SGH. Today we have declared an interim fully-franked ordinary dividend of 21 cents per share, up 5 per cent on the prior comparative period reflecting our confidence in the earnings outlook for the Group. Slide 6 Ryan Stokes Group Overview: Key Financials This summarises the underlying and statutory results for the half, along with a comparison of continuing and discontinued operations. On a continuing operations basis, underlying EBIT for the period was up 42 per cent to $224 million. Underlying net profit after tax was up 81 per cent to $160 million. Underlying earnings per share was 49 cents, up 81 per cent on the prior comparative period. Underlying EBTIDA cash conversion for the period improved by 10 per cent to 58 per cent and will remain a focus in the second half as we seek to improve this for the full year. Statutory net profit after tax for the period was $158 million, largely reflecting a clean result with net significant items of $2 million. I will now hand over to Richard to take you through the Group s financials for the half-year. Richard. Slide 7 Richard Richards Financials: Profit and Loss Slide 9 provides both the statutory and underling net profit after tax for the period. I refer you to the Financial Statements within the Appendix 4D for the detailed statutory presentation and description of each significant item. Underlying EBIT of $224 million from continuing operations was up 42 per cent on prior corresponding half. The result reflects the consolidation of Coates earnings from November 2017 as well as a strengthening of WesTrac s performance due to improvements in mining customer activity. 3

5 Consolidated revenue was up 31 per cent to $1.4 billion. Product sales revenue of $351 million was up 35 per cent with increased demand for equipment from mining and construction sectors at WesTrac and a number of ultra class machines and aged inventory sold during the period. Product support revenue of $885 million was up 11 per cent with continued growth in both parts and service. Also included in consolidated revenue for the half is $155 million hire revenue from Coates Hire post acquisition. Ryan will discuss each segment s specific financial result later in his presentation. Other income increased, principally as a result of a $11.2 million distribution from the Group investment in an unlisted media fund. The share of results from equity accounted investees improved by 28 per cent, primarily due to a $36 million increase from Seven West Media given the intangible asset impairment recognised by the business in the previous corresponding period, partially offset by a $19 million reduction in contribution from Revy due to gains on sale of the Pyrmont sites realised in the prior comparative period. Expenses, excluding depreciation and amortisation, increased by $248 million or 25 per cent. Whilst an increase on the prior comparative period, the increase includes the consolidation of Coates expenses for the two months since acquisition. Pleasingly, the rate of expense growth is lower than the Group s revenue growth, highlighting the benefit of cost discipline initiatives across our businesses. Depreciation and amortisation increased by $30 million, reflecting the contribution of depreciation on Coates rental fleet. Underlying financing costs increased by $6 million, primarily due to the interest attributable to Coates for the period with a slight reduction in interest expense from WesTrac Australia given the repayment of a US$75 million USPP tranche in FY17. Underlying income tax for the year was $12 million lower than the prior comparative period. The Group s effective tax rate of 9 per cent has decreased from the 24 per cent in December 2016 and reflects a combination of no deferred tax being recognised on share of associate NPAT, non-assessable income received as well as the proportion of franked dividends within underlying income. Slide 8 Richard Richards Financials: Significant Items Significant items reflect potentially non-recurrent items that arose during the period. These items totalled $2 million after tax and reduced the underlying net profit after tax of $170 million to $168 million on a statutory basis, including the profit contribution of WesTrac China for the period of $10 million. On a continuing operations basis, net profit was $160 million for the half. Significant Items primarily related to a $91 million impairment of our investment in Seven West Media reflecting the closing Seven West Media share price at 31 December This was largely offset by the $80 million recycling of foreign currency translation reserve referable to WesTrac China following its sale in October 4

6 2017 and $15 million in fair revaluation of Coates Hire prior to the move to full ownership by the Group. Slide 9 Richard Richards Financials: Earnings Summary Slide 9 details the underlying EBIT result across each segment, providing a reconciliation to statutory EBIT with an allocation of the significant items from Slide 8. Slide 10 Richard Richards Financials: Cash Flow Slide 10 presents a cash flow summary for the period, and is presented exclusive of discontinued operations for the current period and inclusive of discontinued operations for the comparative given the timing of the sale of WesTrac China. Underlying operating cash flow for the Group was $154 million. This represents an underlying EBITDA cash conversion ratio of 58 per cent, up 10 per cent from the prior comparative period reflecting the contribution of Coates cash flow as well as continued investment in working capital at WesTrac Australia. Cash conversion remains a key focus across the Group. However, we note that going forward the rate is expected to be lower than achieved in recent years. This is due to an increased proportion of non-cash profits from equity accounted investments with low dividend payout ratios. Cash flow from investing activities utilised $105 million and includes $487 million relating to the acquisition of Coates, $118 million additional investment in Beach, offset by $535 million proceeds from the sale of WesTrac China and $17 million in proceeds from the sale of listed investments. Cash flow from financing activities provided $177 million, comprising $385 million net proceeds from the Company s institutional and retail equity raise, $71 million in ordinary and TELYS4 dividends paid and $137 million in net repayment of borrowings. The net cash inflow for the period was $185 million, increasing the balance of cash and cash equivalents to $351 million. Net debt, after taking into account foreign exchange movements and net debt acquired from Coates, increased by $712 million to $2 billion. 5

7 Slide 11 Richard Richards Financials: Balance Sheet A summary consolidated balance sheet is detailed on slide 11. Given the acquisition of Coates during the period, the movements from 30 June 2017 for are largely attributable to Coates. However, where appropriate I will highlight material movements for the period not attributable to Coates. The Group s net assets increased by $304 million to $2.8 billion primarily due to the impact of the equity raise and net increase in retained earnings for the period, partially reduced by unfavourable movements in the carrying value of the listed portfolio. Inventory increased by $39 million, largely due to increased investment in parts by WesTrac as well as a build-up of inventory at AllightSykes ahead of its fulfilment of a major project in the UAE in the second half of FY18. Net assets held for sale decreased $541 million, reflecting the sale of WesTrac China with the balance at 31 December 2017 reflecting Coates fleet assets held for sale. The value of investments reduced by $284 million, primarily due to Coates becoming a wholly-owned subsidiary. The movement in investments for the period includes $118 million relating to the participation in and sub-underwrite of Beach Energy s rights issue, increasing the Group s interest from 22.7 per cent at 30 June 2017 to 25.6 per cent at 31 December Also contributing to the decrease in value of investments was $62 million attributable to Seven West Media largely due a fall in its share price and $50 million net loss on listed investments. Intangible assets increased $1.2 billion, reflecting the goodwill and fair value of brand name on acquisition of Coates Hire. Deferred income decreased by $14 million, primarily due to reduced customer slot fee deposits given the capital sales completed during the period. Net tax liabilities have increased by $121 million, reflecting the net deferred tax liabilities acquired from Coates Hire as well as the gross-up of deferred tax liabilities on indefinite life intangibles referable to Coates. Slide 12 Richard Richards Financials: Debt Maturity Profile Slide 12 presents our debt maturity profile, which includes Coates Hire, which demonstrates a strong and diversified funding base available to the Group. At 31 December 2017, the Group held $2.8 billion in total facilities with $419 million currently available to be drawn and $351 million in available cash. During the period since the acquisition of Coates, $531 million of Coates debt was repaid using corporate facilities and cash, optimising the Group s funding cost differential. 6

8 Our facilities, including currently undrawn short term working capital facilities, provide an average tenor of 3.0 years on a weighted basis while the drawn component of our debt has an average maturity of 3.6 years. The fixed proportion of debt is currently 52 per cent. Approximately $120 million of debt matures within the next twelve months including a US$55 million tranche of the USPP and $40 million of OEM funding. The undrawn facilities, large cash reserves and the value of the listed investment portfolio provide the Group with significant liquidity and balance sheet flexibility. The Group has a number of favourable refinancing opportunities available given the market sentiment and the strength of its banking relationships. Slide 13 Richard Richards Financials: Capital Management The Group enjoys strong shareholder support as evidenced by the performance of the share price over the year, the institutional placement which was 2.7 times oversubscribed and the solid support for the share purchase plan. The placement importantly also increased our free float, providing greater liquidity in our shares and growing our institutional shareholder base. The greater index weighting continues to attract institutional investor interest. Our confidence in the earnings outlook is reflected in the 5 per cent increase in the interim dividend to 21 cents per share fully franked, in line with our policy of maintaining and growing the dividend over time. Now I ll hand you back to Ryan who will provide a more detailed review of the operating performance of our businesses. Slide 15 Ryan Stokes WesTrac Australia Overview Thank you, Richard. On to slide 15. Mining production volumes for iron ore and coal remain at record levels within the WesTrac territories. This is up 55 per cent since The production cycle continues to provide fleet maintenance and renewal opportunities. We are seeing this in a rise in mining fleet utilisation rates, now at 89 per cent in WA and 95 per cent in NSW, along with the increasing average age of equipment. As a result, we have achieved solid growth of parts volumes to support this fleet profile. WesTrac is providing our customers with best in class equipment, backed by people and technology that enable greater utilisation at a lower unit cost. That is our objective. 7

9 Our focus at WesTrac is to retain our advantage by maintaining our cost focus, working with CAT to optimise the supply chain, and utilising data and technology to better support our customers. Slide 16 Ryan Stokes WesTrac Australia Results WesTrac generated strong revenue growth during the half in both product support, up 10 per cent, and product sales, up 36 per cent. EBIT was up by 35 per cent to $101 million, and the EBIT margin expanded to 8.5 per cent, reflecting improved return on sales achieved by the team while also preserving operational efficiency. Parts lines shipped over the period increased by 11 per cent over the prior comparative period to record levels. Our capacity to deliver parts rapidly to our customers is unparalleled thanks to our world class distribution centres. We are increasingly using data and technology to anticipate and plan customer demand. Equipment sales in the period included several large items of equipment, and pleasingly we have substantially reduced our aged equipment inventory. CAT lead times have extended for some large construction and mining equipment and certain parts, reflecting the global demand in the resources sector, and we are investing in component rebuild activity to ensure that customer demand is met. We have seen solid activity in the construction space, particularly in New South Wales. The step up in activity has created incremental demands on labour where we are seeing the emergence of some skills shortages in certain markets, we have plans to ensure we meet activity levels. Slide 18 Ryan Stokes Infrastructure Outlook Since the last time we showed you this chart, $15 billion in road and rail infrastructure spending has been added to the pipeline. The trend remains positive for infrastructure activity in key urban markets. It s worth noting that this chart excludes major projects such as Badgerys Creek and Snowy Hydro 2 for example. These will further extend the strong forecasted spend beyond Rental will be increasingly important to support the activity levels and requirements of contractors delivering these projects. Slide 19 Ryan Stokes Coates Hire Results Coates Hire has performed well during the half, with EBIT growth of 15 per cent on the prior corresponding period, ahead of the guidance that we provided at the AGM. 8

10 Revenue grew by 4 per cent in the half, with the strongest growth recorded in Queensland, while NSW and Victoria continue to perform well. In WA, Coates Hire is well positioned for a recovery in the market, however trading conditions remain soft at the current time. EBIT margin expanded to 17.8 per cent, reflecting an improved rate of return on existing fleet and better price realisation in all regions. Equipment utilisation rates have improved from 55 per cent to 57 per cent. Fleet relocation has had a positive impact, and this reflects the advantages of the Coates Hire branch network. Senior debt of $585 million was repaid during the half, leaving the Coates Hire balance sheet in a strong position. Slide 20 Ryan Stokes Coates Hire Strategic Rationale The Coates Hire transaction was a unique opportunity for the Group to expand its Industrial Services offering, in a business in which we have a deep knowledge and understanding from over 10 years of ownership. Strategically, we have invested in a business in the right markets, at the right time in the cycle, with quality and well managed assets, diverse customer base, and a capable management team. The focus of the team is to drive price realisation, fleet utilisation, and operational efficiency with an unparalleled focus on safety. There is a strong fit and we know the opportunities that exist within Coates Hire to drive incremental value. Financially, the transaction is EPS and cash flow per share accretive while also providing funding synergies and savings across the Group. Resolving the ownership structure also allows us to reposition Coates Hire for growth. Slide 22 Ryan Stokes Media Investment Results The Media segment contributed EBIT of $52 million for the half, up 32 per cent on the prior comparative period. The equity accounted earnings from Seven West Media improved by 7 per cent, while additional income was generated through a distribution from the Group s investment in an unlisted offshore media fund. The media landscape in Australia is challenging and rapidly evolving. Seven West Media is responding by overhauling its operating structure, reducing costs and using its content in better ways to reach the target audience. Cost reductions of $40 million have been announced for FY18, with an incremental $70 million in net savings identified for FY19. This includes reducing headcount within Seven by more than 200 people. These measures will ensure that the business can maintain its market-leading position without sacrificing the quality of its content and delivering shareholder value. 9

11 Seven West Media has maintained its earnings guidance of FY18 underlying EBIT to be in the range of $ million. The business also forecasts its FY18 group costs to be marginally lower, TV advertising market to grow in FY18, and planning for the current publishing trends to continue. Slide 24 Ryan Stokes Energy Results and Asset Overview The Energy segment contributed EBIT of $22 million during the half, up 26 per cent on the prior corresponding period. We expect the return on our energy investments to increase over time, particularly as Beach benefits from the additional production and exploration upside acquired through the Lattice transaction. East Coast gas remains a strong investment thematic, and in addition to our investment in Beach, we have exposure through Longtom, which is capable of supplying 20 Petajoules into the market from existing wells, and another 60 PJ from an additional development well. This is subject to third party pipeline and processing access, which we are currently negotiating. Crux concept design and selection is continuing under the operatorship of Shell. The recent interest from foreign investors in Australian gas projects is a positive sign, and further reinforces our belief that Crux offers strategic value to LNG investors, and we are confident that value will be realised at the right time in the cycle. Slide 25 Ryan Stokes Beach Energy Overview Beach has announced the financial close of the Lattice acquisition, effective 31 January Beach s result for the half does not include the economic value of the Lattice earnings accrued from 1 July 2017, which was reflected as a purchase price adjustment. For Beach, the transaction increases 2P reserves by 200 per cent and FY18 pro-forma production by 150 per cent, while diversifying operations across multiple basins, including a 50 per cent interest in the Waitsia Gas Project in WA. For SGH, we have created value for our shareholders through the equity placement and sub-underwriting, increased the ownership interest to 25.6 per cent, and increased our exposure to the East Coast gas market. Beach s financial result for the half saw a 12 per cent increase in revenue and 5 per cent increase in underlying NPAT. Production guidance has been upgraded, the high success rate of new drilling has continued, and the capital program has been streamlined. The Lattice integration process is well-progressed, and the focus now is capturing the synergy benefits, which Beach has increased from $20 million to $50 million per year, in areas such as procurement, overheads and field operating and maintenance costs. 10

12 Slide 27 Ryan Stokes Property and Listed Portfolios The property portfolio delivered a limited contribution to Group earnings given the stages of our current projects and state of Perth s real estate market. We continue to sell lots at our Seven Hills residential development. The listed investment portfolio provided the Group with dividend income of $17 million at a gross yield of 9.1 per cent for the half. The market value of the portfolio declined by $50 million during the half to $436 million. The portfolio has performed well over the long term with $64 million of unrealised gains recognised in reserves. Slide 28 Ryan Stokes Outlook: Key Takeaways and Questions The recent strength that we have seen in our operating businesses has carried into the first half of FY18, with WesTrac and Coates Hire both performing well on revenues, EBIT and margins. WesTrac continues to execute effectively. We see some encouraging signs of the fleet renewal process, and the high volume of resource exports from the mining production cycle continues to provide maintenance opportunities. Coates Hire is benefitting from the increase in infrastructure spending while also maximising the return on its assets through better utilisation rates, improved turn around times, and improved pricing. In both businesses we continue to deploy data and technology to enhance the customer value proposition. Our aim is to retain and grow our market-leading position as the preferred supplier of equipment in respective markets. Our investment in Beach will see an improved return as the contribution from the Lattice acquisition will flow through in the second half result. We are also focused on bringing Longtom gas to market. At Seven West Media, the focus is on cost and debt reduction, with a broad program of cost initiatives to be delivered in FY18 and FY19, to ensure the company remains competitive in a challenging media landscape. SGH is well positioned in the various markets we operate within to deliver value and the outlook is positive. We have a strong balance sheet and a focus on cash flow and capital management. Today, we upgrade our full year guidance to 15 per cent growth in FY18 underlying EBIT as compared to FY17 pro-forma underlying EBIT, which is outlined in Appendix 1. Thank you. We would be pleased to take your questions at this time. 11