Cardno Ltd

ASX:CDD

Earnings Call Transcript 2021-Q2

[Jackie McPhee, Corporate Marketing Manager]

Good morning, and welcome to Cardno's Half Year '21 Results Presentation with CEO and Managing Director, Susan Reisbord; and CFO, Peter Barker. [Operator Instructions] Thank you, and over to you, Susan.

[Susan Reisbord, CEO, MD & Director]

Thank you, Jackie. As Jackie mentioned, Peter Barker, our CFO, and I are happy to welcome you today to our half year results call. Before we begin, I would like to do an Acknowledgment of Country. In the spirit of reconciliation, I'd like to acknowledge the Traditional Custodians of Country throughout Australia and their connections to land, sea and community. We pay our respect to their elders, past, present and emerging, and extend that respect to all aboriginal and Torres Strait Islanders people today. Jackie, next slide, please. So what we'll go through today is a performance overview, then a detailed financial review, which Peter will share with you. I'll talk about how we're assisting clients with ESG goals, and then we'll provide a wrap-up commentary and outlook for the rest of FY '21. Next slide, please. It's always exciting time when we're announcing our results, especially when we have good news to share with you. But putting together this presentation, I didn't just reflect on the last 6 months, which would be natural for this. I was reflecting on the last year and the COVID pall that was across not just Cardno, but worldwide and then actually took a look back to the last 4 years, and really, Cardno's journey to find our identity as one company. And it's really taken us that 4 years to find this identity. So we are a multidisciplinary scientific, engineering and development consulting firm and really designed now to assist our clients in meeting their ESG goals. And the journey took us through like these 6 major efforts. The first is we really did exit legacy services and subscale markets. So we, through divestiture, moved out of businesses that were lower margin or higher risk. And we are exiting and have exited geographies where we were just too subscale to be able to make profit. We significantly, a little over a year ago, went through the demerger with Intega. And this was actually a really very good move for us. It provided us with a more consistent operating model; helped to strengthen our identity; and most importantly, for both Intega and for us, it eliminated the conflict of interest that we were starting to experience as both companies were growing more effectively. We built an employer brand identity, not only our shared vision and our purpose to make a difference, but our value: safety, people, integrity and excellence. They came from our staff, and they're more than just words on a wall, they're really the guidepost that we used that really informed the decisions we made over this past year, which was a very challenging year. We established a high-performance culture supported by employee growth and development with our technical excellence program, our high potential program, our leadership development and the expectations that we have and that we share through our performance review process. And finally, we've made a deep and abiding commitment to diversity, equity and inclusion. And what that means is that everybody at Cardno, we want them to be able to bring their whole self to work, and not just accept differences, but actually celebrate the differences that we all bring. We have a key account focus and growth, and we've spent a lot of time on that again in the last 4 years, and I have to say it really has served us well through the COVID storm. We got tighter with our clients from a client service standpoint, and again, helped them deliver under very challenging conditions. And those of you who know me know that I'm very old school with regard to financial discipline and alignment, and we've spent a tremendous amount of effort establishing regional policies and practices to make sure that we are increasing the performance and meeting the performance of the business. We've addressed legacy operations and system deficiency, but really excitingly, have begun to provide for integrated global working across the business. And it's really due to the dedication because when we talk about this, there's 3 bullet points on a chart, but it really has meant a big change for people throughout Cardno. And our staff has really come forward, and we're seeing the results of that. And then finally, a leadership team is that we have a dynamite global leadership team that we have not just deep experience in the areas where we have expertise, but really long-tenured leadership, particularly that came through many of the legacy companies that have built Cardno. And if there are attributes about Cardno that I am most proud, by the way, it's the fact that we have a very flat organizational structure. We have very hands-on leaders that are client-facing themselves. So what that means is we've got a strong platform for revenue growth and margin expansion and it's bolstered by our people, our clients and the capabilities that we have. And we've got a really good message, too: we are absolutely built to help our clients meet their environmental, social and government needs and commitments. And there's so much talk about ESG, but the one thing that makes me really happy is ESG isn't something that we're becoming, it's not something that we have to get good at, it's something we are and have been good at. We were ESG providers before ESG providers were cool. So I'm very happy with the position that we have. Next slide, please. And so where are we for the half year? Our pre-AASB 16 EBITDA results are $24.7 million, and that's up on the prior year at the same time of $22.5 million. And so as a result, I'm happy to announce that we're revising our FY '21 guidance and we're revising it upward to -- we expect to end the year somewhere between $45 million and $50 million. And we're also declaring an interim dividend of $0.015 per share, and we're very excited about that. Now when you look at our numbers, you'll see our revenue declined and -- compared to the same time last year. Two big reasons: one, there's an exchange rate fluctuation, which is significant, considering how much of our revenue comes out of the U.S.; and we also had a shift in time of certain field and project efforts when compared to the same time last year. But if you look at it, and particularly on a constant currency basis, if you look at like bulk of the business in APAC and Americas consulting divisions, that gross revenue decline is only about 2.2%. So over that group EBITDA of $24.7 million, Americas delivered $18.5 million of it, Asia Pac delivered $3.9 million and our International Development team delivered $2.2 million. And I'd really like to highlight particularly the improved performance over last year of both Asia Pac and ID because they did do this improvement and they did it even despite large COVID impacts. You don't hear me talking about COVID a lot through this presentation, but I'm really proud of these results because they were able to be achieved even through the challenges that we had with regard to COVID. Our NOPAT is $14.7 million, and we have a continued strong balance sheet and cash flow, and Peter will talk to you more about that in his part of the presentation. As I mentioned before, because of this new Cardno identity of what we've been able to create over the last 4 years, we are built to support our clients to focus on helping them meet their ESG needs and commitments. And in FY '21, as I mentioned before, we are expecting to outperform our earlier guidance, and again, revising that to 45 -- to extend the year at $45 million to $50 million. And again, we're declaring the dividend. Next slide, please. With that, Peter, I'd like to hand it over to you to walk through the detailed finance review.

[Peter A. Barker, Chief Financial Officer]

Great. Thanks, Susan. Just finding the mute button. Thanks very much. So if we move on to Slide 6, which is our half year financial highlights. This table represents a lot of what Susan was just talking to. Now obviously, a material part of our business is denominated in U.S. dollars. So as we repatriate -- as we translate those into our financial statements reporting Australian dollar. To give you a feel, our first half of FY '20, the average exchange rate was about $0.68. Into first half of '21, FY '21, it's up around $0.72. And so what we've done on the right-hand side there is provide for the major data points a reconciliation on a constant currency basis, which as I said, you could see on the right. Now in terms of looking forward, Susan and I are going to talk about that guidance a little later in the presentation. We have factored that in -- FX into it. However, clearly, it's based on the FX rate as it is today rather than a substantially different number. So hypothetically were the Australian dollars go to parity or were to go to $0.50, it creates a different outcome. You can do the translation if you go to the U.S.-specific page, which I'll come to in a few pages where we actually report in U.S. dollars, so you can work with that math if you so choose. As Susan said, the revenue looks slightly off associated with FX, but also the timing of some large projects. So investors will recall that a year ago, Susan and I were talking about some really substantial projects in our Americas business primarily that were quite large and quite bubbly as such. Now they came through. Pleasingly, the Americas -- and those projects largely concluded. Pleasingly, the Americas has continued to expand their work elsewhere. So you didn't see that large drop-off that large project ends not backfilled. We backfilled those with work behind it, which is most encouraging. Also on this page, I'd just draw your attention to backlog. So again, half that backlog is in U.S. dollars, so impacted by FX. When we get to the individual pages, you'll actually see the Americas have grown their backlog year-on-year. Asia Pac is flat. And International Development is down slightly associated with a multiyear bidding cycles that ID, International Development, go through. So all in all, we believe we've got very solid underpinnings for the guidance update that Susan just spoke to. So if we roll forward on to the next slide, so this is a walk from our EBITDA. Now this is underlying EBITDA through to our NOPAT. And I draw investors to the blue -- dark blue bar in the center, an underlying NOPAT of $14.7 million. Now the reason that's particularly relevant is, as Susan just said, in terms of dividend policy, our intention is that between 50% and 70% of that number is the intended dividend going forward. Now like all dividend declarations, they're subject to performance at the end of the day, but that policy is to be 50% to 70% of that underlying NOPAT. Also, I will state to investors that this is the last half where we'll be reporting on both a pre-AASB 16 and a post-AASB 16 basis. Going forward, we will be entirely with AASB 16 incorporated. And you actually see this on Slide 7, our AASB 16 plus, if you will, EBITDA is $39 million rather than the $24.7 million that Susan and I are talking to, respectfully, to provide our guidance. Also on this, attention -- I draw your attention to our actual net profit after tax, which is higher than our NOPAT, primarily due to some very encouraging progress that we've made in winding down our position within Latin America associated with the Caminosca business that long-term investors will be broadly familiar with. A number of project milestones were completed. A number of issues were wrapped up, which meant that we recorded that benefit through the P&L there. And we are showing it as a discontinued operation, which is why it's here in the nonrecurring benefit section. Just moving forward to Slide 10. This is the bridge, as I said to Slide 8. This is the bridge from pre-AASB 16 to post. And as I've said, we will be reporting on a post-AASB 16 basis going forward, and of course, providing the comparables so that the reader can interpret accordingly. Okay. So with that, let's look at how the company looks around the world on Slide 9. So Cardno is basically 3 large businesses: our Americas Engineering and Environmental business, our Asia Pacific Consulting business and our International -- global International Development business. Portfolio Companies now is our business in Latin America, primarily. And as stated, we're in the process of winding down our position in primarily Ecuador.Moving forward then on to the Americas business, specifically on Slide 10. Now these numbers -- the rest of the entire deck is in Australian dollars, this page is in United States dollars. And the reason we did that is Susan and I want to be able to clearly explain how our Americas business is doing and take the FX noise out of it, if you will. As you can see there, gross revenues slightly down and fee revenue also slightly down, and Susan talked and I talked about a little earlier. It's really got to do with the timing of projects last year. Most encouragingly, backlog continues to grow. So that really sets us -- the Americas business up well for the rest of the financial year. A really healthy mix of wins there, a number of U.S. government projects, which is tremendous for our Government Services business within the United States. SoCal Edison, Southern California Edison, is a major client with a substantial amount of work assisting them with their environmental compliance and management work. Now we've said in a line there, Americas produced strong performance notwithstanding COVID-19. Now if you looked at our financials in isolation, you weren't aware of COVID-19 and living in a bubble, you might wonder what the story is. And the way we best express COVID-19 is we think our business around the world would have done a bit better had COVID-19 not been an impact. So for example, in the United States, where we, as I said earlier, do a lot of work for the U.S. government. A number of base closures meant that our folks literally just couldn't get onto the base, which meant that project didn't go away, but the project shifted your right, my right -- shifted to the right and that had some impact on FY -- on first half FY '21. Same story in Asia Pacific, especially our Victorian business, over 100 days of lockdown in Victoria. Our people did some remarkable heavy lifting to keep business going, but it did have some impact. We haven't specifically broken it out because, frankly, it's -- we don't believe it'll be overly helpful for investors. So all in all, the Americas business toggling along really well and they're very well set up for the second half. Moving on to Slide 11. Asia Pacific. Now a year ago, and indeed 6 months ago, Susan and I were advising the market that we're making slow and steady progress, but we've yet to see that really starting to come through our numbers. It's starting to come through our numbers. So there's a lot -- we've got quite a bit to do, but our Asia Pacific team are quite focused on getting the business to the productivity levels that we historically have enjoyed in Asia Pac and we know how to do it. So the message here is we're starting to finally get some runs on the board. And it's -- we've got a nice mix of project wins with some more coming. And critically, they're across 4 geographies around the country. And this focus on back-to-basics operation improvements starting to put some runs on the board, as I said. And their backlog, ever slightly down at $123 million versus $127 million last year. So again, that's got to do with timing of projects towards to the right.Moving forward then on to the following slide, Slide 12, International Development. So again, pleasing to see a modest, but encouraging improvement of their profitability. Remembering that, historically, our International Development business is a high gross revenue, comparatively low EBITDA margin business, but they do -- it's also a low financial risk business. The projects that we do are extraordinary around the world, especially in the emerging world, but they're not financially, if you will, or technically that difficult per se. So it runs as a slightly lower margin business. Now we have really returned to our roots of our core markets of Australia and supporting our client DFAT there. And U.S. donor organizations, including -- primarily USAID, we have reduced our exposure in Europe. That's in terms of boots on the ground, but we'll continue to support European donors throughout that level of field work. A number of great project wins there to celebrate. And again, their backlog is -- ID's backlog is down, but that's really got to do with a multiyear award cycle in terms of when projects get developed. So it's still -- we stand that as a very, very healthy backlog albeit it's not where it was last year. And again, multiyear project awards determine when that backlog goes up and down. Moving on to our balance sheet on Slide 13. Our balance sheet has remained as it has for the last 5-plus years as conservative as we deem appropriate. Our net debt-to-EBITDA is at 0.2x. We have substantial undrawn debt and firepower there. Our working capital ratios, we believe, look pretty good. Our debtors plus WIP, DSO, sits at 71 days, which is down from 80 days a year ago. That's debtors plus WIP. So basically, the time from -- one of our people putting time on a time sheet to collect in the cash is 71 days, which we understand is close to, if not, industry best practice and long might they stay there. Our loan facility, we have 4 vendors, expires in October 22. And so we'll begin that renewal process later this calendar. So again, substantial firepower in our balance sheet. Moving on to our cash flow. Cash is king as they say. So operating cash flows up half-on-half, but I'd just draw investors' attention to the fact that Cardno did not receive any JobKeeper. We didn't qualify for, and thus, certainly didn't receive any JobKeeper benefits from -- through the ATO. However, we did take a deferral of goods and services tax, GST, from the first half of calendar '20 and second half. And we repaid $10.4 million of that in September. So what that means, if you will, is that our cash provided by operating activities take $11.8 million and $10.4 million gets you $22.2 million, which isn't all that far away from our underlying EBITDA of $24.7 million. So cash is close to EBITDA, which obviously is important for me to be able to say. We did return surplus funds to shareholders through a buyback of some 10.4% of the company's shares in the first half. And Susan has already spoken to our dividend that we'll be declaring and a record date in March. Okay. That's the financial section. Back to you. Thanks, Susan.

[Susan Reisbord, CEO, MD & Director]

Okay. Thanks, Peter. So next slide, please. When we talk about Cardno supporting the ESG goals of our clients, it's -- there's a lot of talk around ESG. So what exactly are we talking about? Well, worldwide, investors, regulators and community stakeholders, are really driving our clients. And what we're seeing is they're driving our clients for more transparency and more disclosure with regard to ESG commitments: what are you doing, how are you doing at it, what progress are you making? And that means, given our service offerings, we're in a great position to help them manage the risk associated with these ESG commitments as well as capitalize on the opportunities they provide. And the way we do that is because we are that trusted adviser, right, providing practical, pragmatic and ethical advice to support them to meet their commitments. Now we do that through like our 4 major type of service offerings: we have environmental services; we have health services; we have design services in water, transport and urbanization; and we certainly have social development. So when we look at the details, we help our clients with their assessment, permitting and compliance for energy, power and the defense sector. So we're working on military bases, ports, harbors, hydroelectric power dams, natural gas pipelines. And we're seeing a tremendous surge in our clients' work with regard to renewable energy sources. We do environmental restoration work that not only repairs environmental damage, but is also being used now to mitigate climate impacts. And so that means an emphasis not just on gray infrastructure where the design would come in sustainable design down below, look at the green infrastructure that restoration provides. And we, of course, do incident response for things like the fires, floods and spills. ChemRisk is our health sciences group. And again, I mentioned it at the half year and I feel very strongly about it today, it's one of the biggest differentiators that Cardno has to offer. We can characterize human health and environmental risks associated with chemicals, pharmaceuticals and radionuclides in a variety of media and environment. We help our clients create science-based solutions, right, for responsible product stewardship and employee safety and community health support. And we've done -- particularly this year, been designing and conducting epi studies for both community and occupational safety, and as you can imagine, most recently with regard to demand in and around COVID-19. From a design standpoint, we do sustainable infrastructure: water, transport, urbanization. We do the asset management to help our clients extend the life cycle of the management of their assets and the life of their assets. And when we look at -- it's not just design, but it's a sustainable design with regard to land development, brownfields development -- brownfield development, ports and harbors, again, transportation, water or wastewater, a variety of different infrastructure projects. And we have a really nice service, particularly in our Government Services business, of military master planning to create and improve and sustain military communities around the world for our clients. And then social development where we partner with both public and private sector clients to promote not just sustainable economic development, but actually the increase of well-being for local communities. And we do that across a variety of sectors: it's agricultural, it's global health, it's infrastructure, climate, gender and inclusion. It's a variety of different services through our business. And then, of course, we're working to help our clients eradicate modern slavery within their supply chains. So we feel very strongly about the fact that we can help our clients, again, meet their ESG commitments with science, with engineering and really sound policy-based solutions. Next slide, please. And I'll show you how we do that because we can talk about service lines, but how does that translate for clients? And I'll talk about 4 projects. So one is work that we're doing with regard to relicensing of a hydropower dam for Southern California Edison. This relicensing is important to Southern Cal Edison because it's about a 9-megawatt renewable energy source that helps them serve their 15 million-strong client base. And why is Cardno special to that? It's because not only do we know the way to do relicensing, so there were regulatory requirements and the technical requirements for that, but we also have the multi-disciplined scientists, so in the areas of aquatic or cultural or land, recreation or terrestrial resources, to pull together that -- to understand the interdependence of that to be able to responsibly relicense the dam. Second project I'd like to talk about is the Blue Heron Slough Conservation and Mitigation Bank. This is in the U.S., the Pacific Northwest first conservation bank. It's a project that included about 350 -- well, 364, to the exact, acre estuary restoration project that resulted in more than 10,000 Chinook salmon credits and 240 wetland mitigation credits. Again, how does that translate to business, right? It's great work before our clients, right? It helped the Port of Everett fulfill their long-term plan while still having 60% of the credits created available for sale to third-parties. And that work was done from concept to construction in 18 months. I'd like to talk about the Papua New Guinea Biodiversity Program. It's really an exciting and a real hallmark project for us to be part of. PNG's environmental biodiversity is among the world's richest and the most at risk. And so it's such a valuable asset, how can we help to make sure -- to help make sure that it's protected and used effectively. Well, we bring our deep expertise, right? So what Cardno brings is the natural resource expertise as well as the planning and governance programmatic framework expertise to create an environment where we can support both the ecological and local governance capacity assessments that inform that community engagement. So we're aiming to help, again, protect this biodiversity and put it to work for PNG. And then finally, I'd like to talk about Greater Springfield. Now Greater Springfield was founded, what, more than 25 years ago. And interestingly enough, I was talking to the program manager -- client service manager for this project and he mentioned that, at its founding, one of the fundamental promises was to retain 30% green space across the project. So we've partnered with the client for more than 20 years to bring this multidisciplinary expertise in creating a best-in-class community. So it's sustainable design. It's environmental services, it's health equity services and it's certainly social development services that help our clients achieve their business outcomes. Next slide, please. Then a year ago, one of the things that I talked about in this kind of meeting is that we, at Cardno, were doing a lot of great things that would be under this ESG umbrella, right? But we were doing them in a very compartmentalized or siloed sort of way because the efforts that had been occurring were occurring through what was basically our legacy construct, right? Well, 2020 really saw Cardno move from a company that has global offices to a global company and no place was that more evident than really in how we came together as one with regard to ESG and sustainability. So this graph shows all the things that "we have done" in 2020. And again, it's astounding to me and I'm so proud of what we've done despite the fact that we were always -- also managing COVID during this period of time. But what this doesn't show is all the people who came together to make it happen because it's been remarkable that the people that have come together to drive all of these different initiatives have come from around the company -- from all different geographies, all different divisions and all different disciplines. And we are truly lucky that we have come together as a company. So the other thing that I'd like to highlight is one of the ways that we approach this is we -- this is just Cardno's stance, is we said ESG sustainability, diversity, equity and inclusion, those aren't one person's job. It's not like we set up one person to do those things or to steward all of this for us, right? This is part of everybody's job at Cardno, and we've got a tremendous groundswell of support from our staff to that end. Next slide, please. So we'll go ahead and wrap up with the outlook for FY '21. Next slide, please. So our focus remains on people development, margin expansion and smart growth. And we'll do smart growth both through organic growth, again, key account planning, and through acquisition. We have a continued focus on assisting our clients, as I've talked about several times, supporting them to meet their ESG goals. And what's great about that is it's not just technically rich work, it's decidedly rewarding work for our staff. We continue to proactively manage COVID impacts and support our staff through that. And we're improving our financial and business discipline through consistent processes and policy implementation, and I'm glad to say that we're seeing the fruits of that labor. I already talked about key account development not just for enhancing client services, but it also helps us protect our margin growth. And we're executing on strategy, conservatively funded acquisitions with a very disciplined mergers and acquisition process now. We're driving innovation and digital transformation because part of Cardno being one is integrated global working. And -- but we're doing that in really practical, cost-effective, client-focused way in the sense that we're not doing sort of cool things for cool things' sake, we're really innovating based on what we know our client needs and client -- in partnership with our clients. And finally, we're lifting staff engagements. You saw the results of that with regard to ESG and the sustainability planning, but we're doing it through all of our efforts in diversity, equity and inclusion; workplace -- workforce development; service line leadership, which is really our Technical Excellence Program and connecting people globally across the technical disciplines they have; and really with regard to global project opportunities. So while the impact of COVID and various business-specific factors make it hard to predict, including things like Peter talked about, which is exchange rates and certainly climate events, based on our company's first half results and outlook, we expect that we're going to achieve an EBITDA in FY '21 of $45 million to $50 million. And again, that's up on previous guidance. Cardno will restart its dividend program and we expect to provide an ongoing dividend, as Peter mentioned, of 50% to 70% of underlying NOPAT. And in H1, we'll pay an interim dividend of $0.015 per share franked to 60%. And future dividends will be franked as franking credits become available. And so with that, I'd like to close our formal presentation, and thank you all for your participation.

[Jackie McPhee, Corporate Marketing Manager]

Thanks, Susan and Peter. We'd now like to open the webinar to questions. [Operator Instructions] No questions coming through at this stage. I'll just give it 1 more minute to see if we have anything come through. No questions coming through. So I think that will conclude our presentation. Thanks, everyone, for joining us today.

[Susan Reisbord, CEO, MD & Director]

Thank you, and thank you, Jackie and Rachel and Peter.

[Peter A. Barker, Chief Financial Officer]

Thank you, everybody.