MACMAHON HOLDINGS LIMITED
ANNUAL GENERAL MEETING – FRIDAY 9 NOVEMBER 2007
CHAIRMAN’S ADDRESS
Chairman – Mr Richard Carter
Good morning ladies and gentlemen, I am Dick Carter, Chairman of the Company. Welcome to the 2007 annual general meeting of members of Macmahon Holdings Limited.
2007 has been an outstanding year for the Company.
Our decision to focus on two core business is now paying off. The company has achieved major milestones, having broken almost every record in its history, including:
- record revenue and profit - a record order book; and - increased EBIT margins and dividends.
Remarkably, all of this has been achieved while improving our safety performance and growing our employee numbers substantially.
A number of large, high profile contract wins and extensions have included:
- Phase 2 of Rio Tinto’s underground development works at the Argyle Diamond Mine in the Kimberley Region of Western Australia
- Extensions at BHP Billiton’s open cut iron ore mine, Ore Body 18 / Wheelarra near Newman, WA
- The Logan River Catchment Project for the Queensland Government
- The Kingsgrove to Revesby Quadruplication project (K2RQ), for the New South Wales Transport Department
These wins and extensions reflect not only our increasing presence as a national contractor, but also our strengthened capabilities.
So far in the current financial year this success rate has continued with several further contracts being won.
The successful acquisition of the specialised mining services businesses ARD and CRE in
For personal use only use personal For late 2006 have expanded our core mining capabilities and skillset, with the Mining Business now offering our customers a complete mine service.
The Allplant Hire business was sold in November 2006 to Coates Hire, delivering an after tax profit of $11.1 million. As a non-core business, the decision was made to divest Allplant Hire at an attractive valuation, with the benefit of reduced future capital expenditure requirements.
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The Total Revenue for 2007 was $966 million and as I have said, that is another record for our company.
The markets in which we operate are the strongest they have been for a considerable time and Macmahon continues to follow our long term growth strategy, focussing on its core markets and growing the business through East Coast coal and construction opportunities.
Revenue growth from the Mining Business was driven by a booming resource sector. During 2007, the Mining Business successfully established and renewed contracts totalling more than $700 million, the majority of which were with our blue-chip customer base.
Revenue growth from our Construction Business was driven by increased demand for infrastructure, particularly in Queensland and Western Australia. Major government spending on roads, rail and water and increased resource infrastructure spending by major mining houses, continue to buoy up this sector.
Reported profit after tax including the profit from the sale of Allplant was another record at $44.5 million. Our underlying profit, was again, a record at $33.4 million, 22 per cent higher than the 2006 result.
At 30 June, Macmahon had an order book of just above $2 billion, which included $840 million of work on the East Coast and $933 million of revenue “locked in” for 2008. This growth reflects our ability to win and deliver major projects for our customers and the strength of the industries we service.
For a contracting company, people are our single and most valuable asset.
They comprise the organisations intellectual capital and its “can do” capability to deliver its services to customers.
Macmahon now has more than 3,200 employees delivering on our commitment to our customers every day.
Our main goals are to keep everyone safe and enable employees to develop their professional skills.
We are committed to delivering a safe and rewarding workplace to our employees and we continue to focus on both retention and recruitment.
Significantly, we improved our safety performance during 2007 and we are continuing to promote behaviour based safety initiatives across all our sites.
Already a leading mining contractor, Macmahon is emerging as a top tier construction contractor in Australia. The expansion of our East Coast operations demonstrates that we are building a strong reputation in these relatively new markets.
For personal use only use personal For The $250 million Jilalan Rail Yard Upgrade for Queensland Rail is a prime example of our successful entry into this market. Our largest single construction project, this project is of extreme importance to the Queensland Government and the coal industry, increasing the capacity of the Goonyella rail system, a vital network component for processing coal trains from the Bowen Basin.
Another major East Coast project win during 2007 was the $240 million Hale Street Bridge project for Brisbane City Council.
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During the year we moved to new offices in Sydney and Brisbane to serve the growing East Coast market.
Of course, with all of this focus on the East it is not to say that our business in Western Australia has slowed in any way, with WA projects representing over $1 billion of the order book.
The underlying Earnings Per Share figure in 2007 increased by 16 per cent to 6.4 cents and each year your directors carefully consider a range of factors when determining the amount of the dividend paid to shareholders.
The Board’s policy is to pay only substantially franked or fully franked dividends and the amount of dividend is subject to profitability, cash flow and capital expenditure requirements.
For 2007, the Board declared fully franked dividends totalling 3 cents per share, which is a 50 per cent increase on the 2 cents per share paid in 2006.
The total 2007 dividend figure represents very close to a 50 per cent payout of underlying profit, compared to the 36 per cent of underlying profit paid for the previous year.
The Macmahon dividend reinvestment plan continues to operate and I am able to report that shareholders holding almost 50 per cent of the shares on issue chose to participate in the plan this year.
Our growth strategy continues to deliver significant value to our shareholders. This is reflected in the growth of our share price and shareholder base.
As many of you are aware Macmahon has been listed on the Australian Securities Exchange for 24 years and we now have more than 8,000 shareholders so there are at least 1,000 more of us than when I spoke to you at the AGM last year.
The significant growth in both our share price and Market capitalisation are further indicators of how Macmahon has been re-rated in the marketplace.
Our current share price reflects our financial result, our growth and the outlook for the industry sectors we service.
We started the 2007 financial year with a share price of 80 cents and yesterday the price was $1.95. That share price is a significant increase on the 45.5 cents per share we recorded at the start of the 2006 financial year.
Further confirmation of our success and of the significant progress we have made was provided two weeks ago when Macmahon was included in the S&P ASX 200 for the first time.
The status of an ASX 200 company ensures there will be wider interest in our shares and as at the close of business yesterday the company had a market capitalisation in excess
For personal use only use personal For of $1 billion.
Although I am sure no-one needs reminding, the Board and in fact, the company as whole, are driven by the requirement to deliver continuous improvement in Total Shareholder Returns.
Our aim is to be the long term investment of choice in our industry sector and we are focussed on delivering top quartile Total Shareholder Returns.
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During the past five years, through dividend and capital growth, Macmahon has delivered a cumulative return on investment of 359 per cent. In keeping with the results of recent years, the growth achieved this year was a healthy 65 per cent.
Now as many of you are aware our success and achievements have not passed unnoticed.
As I mentioned earlier we have attracted the attention of many new investors from all over the world.
One such major investor is Leighton Holdings Limited, which is now our largest shareholder with 15 per cent of the company.
On Monday we announced that we had signed a Memorandum Of Understanding to formalise a partnering relationship between the two companies.
Under the MOU, Leighton will promote Macmahon as a “Partner of Choice” to joint venture for large infrastructure and resources related construction projects.
The agreement specifically excludes contract mining as Macmahon already offers a complete mine service to mine customers for both open cut and underground mine operations.
This agreement will deliver the opportunity for Macmahon to boost our East Coast momentum in ways that would not be possible in the foreseeable future without a strong partner.
The MOU targets projects which expand the Company’s capabilities, experience, geographic diversification, market position and ultimately profitability.
As part of the MOU we will invite a Leighton representative, Mr Vyril Vella, to the Board.
Vyril has 33 years of experience in the construction industry and we look forward to his contribution as we continue to pursue our growth strategy at all levels of the business.
This MOU, which has an initial period of two years, after which it may be extended, includes the application of a rigorous probity regime to ensure that the sensitive commercial information of both companies is preserved. It also contains a standstill agreement.
This standstill agreement requires that Leighton obtain written consent before acquiring a shareholding beyond 19.9 per cent of the issued capital of Macmahon.
So in summary, we now have Leighton as a supportive shareholder, we remain a totally independent company and we can accelerate our growth which is a great outcome for all shareholders, employees and customers.
Although from an operational perspective it remains business as usual throughout
For personal use only use personal For Macmahon, I believe we are entering a whole new era of sustained growth for the Group.
We remain in an ideal position to pursue further growth at a time when Australia is experiencing the highest level of infrastructure and mining activity in history.
Macmahon is continuing to improve the manner is which it de-risks its business and although a number of current initiatives will probably take 12 to 18 months before the full benefits are realised, the important thing is we are planning for future success.
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Macmahon has proven itself as a safe, reliable, secure and high quality contractor. As a direct result of these attributes we now work for some of the biggest state government agencies around Australia as well as many of the world’s leading “blue chip” mining companies.
Macmahon today is bigger, stronger and more adaptable than it has ever been. The company is continuing to grow and positioning itself so that changes in either commercial or commodity cycles, will not undermine our ongoing success.
We continue to look at strategic acquisitions to broaden our capabilities, extend market coverage and provide additional resources. However, organic growth remains priority.
We continue to pursue business initiatives designed to improve productivity and market competitiveness, which in turn, ensure we continue to capitalise on the opportunities presented by a buoyant resource sector and a period of unprecedented government infrastructure spending.
I hope this overview has provided some additional insight into the state of your business and confirmed that we remain completely committed to delivering considerable value to all our shareholders, through the energy, quality and commitment of our people.
My thanks and that of each of my fellow Board members go to our employees for their effort in providing a solid foundation on which we continue to build this expanding business.
May I, on behalf of the Board, pass on our appreciation to all our shareholders for the support and encouragement provided throughout the year.
We will continue to do our very best to guide Macmahon on its exciting journey, tackling the challenges ahead with the confidence that flows from success.
I will also thank all of our customers and suppliers for your support and we look forward to continuing to grow with you.
Thank you ladies and gentlemen and I will hand over to Nick Bowen, our Chief Executive Officer, who will provide you with an update on the Company’s activities and outlook.
*** For personal use only use personal For
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MACMAHON HOLDINGS LIMITED
ANNUAL GENERAL MEETING – FRIDAY 9 NOVEMBER 2007
CHIEF EXECUTIVE OFFICER’S REPORT
Chief Executive Officer – Mr Nick Bowen
Thank you Dick and good morning ladies and gentlemen.
I am pleased to present what is my eighth AGM as CEO of Macmahon.
As the Chairman has outlined your company has had an outstanding year in 2007 and Macmahon is now a formidable player in the Australian contracting marketplace. Our success has translated into a significant increase in the share price to record levels and a position in the ASX 200 Index two weeks ago.
A period of rapid growth has seen Macmahon evolve from the modest business of several years ago into a large, diversified contracting Group operating on a truly national level.
Through our involvement in projects in New Zealand and South East Asia we are also gradually building on our reputation and continue to pursue appropriate overseas opportunities.
It is undoubtedly true that the industries we service are as strong as we have seen them in the past 20 years and our increasing ability to win larger projects shows that we have developed a strategy to take full advantage of this buoyant situation.
In my report this morning I will cover four main areas:
- our strategy;
- some insights into our current business;
- an update on the order book; and
- the outlook for Macmahon.
In order to secure our future success, we have during the past 12 months reviewed and reaffirmed our five year strategy for Macmahon, with our projections encompassing the current and expected market conditions.
This strategy has three clear steps:
For personal use only use personal For - growing the mining and construction businesses;
- securing and improving market position; and
- delivering increased total shareholder returns.
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Our strategic priorities during the next two years include:
- attracting, retaining and developing our people;
- renewing and expanding existing contracts;
- increasing Construction market share on the East Coast;
- increasing revenue from open cut coal and iron ore markets;
- growing our underground capabilities and market share;
- expanding our rail and road maintenance capability; and
- securing selected overseas contracts in the Asia Pacific region.
Now tackling these priorities is one thing but it is the overall business conditions which defines our operational environment.
At this time, Macmahon is well placed to take advantage of:
- strong market conditions in the mining sector, driven by demand from China and high commodity prices; and
- significant increases in the level of government infrastructure spending across Australia.
To deliver on our strategy we are conscious that we need to maintain and develop the key building blocks that form the foundation for the current success.
These are:
- our people and their safety;
- the way we manage risk and opportunity;
- how we finance our operations; and
- the systems we use to run the business.
We have developed a comprehensive People Strategy which will assist us to access the additional workforce and deliver the capability we need.
When we look at what Macmahon delivers to its customers on these larger projects I cannot emphasise enough that good people are the lifeblood of our business.
With a total workforce of more than 3,200 employees we are focussing considerable effort on both retaining our current employees and attracting new employees to support our growth strategy.
For personal use only use personal For We have increased our commitment to providing additional apprenticeships, professional training programs, the graduate employment scheme, tertiary scholarships and by expanding our Indigenous employment program.
We now employ around 100 apprentices and have a retention rate of more than 95 per cent. All of this year’s graduating apprentices will move straight to permanent roles with Macmahon.
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Creating opportunities for vacation employment for engineering undergraduates and recruiting more graduate engineers continue to be important elements designed to ensure we are developing leaders for the future. This year we will add 30 new graduates to our ranks.
The investment in our employee programs that we are making today, will deliver tremendous long term benefits for the Group.
During the year, we commenced the implementation of a Risk and Opportunity Management system.
Risk and opportunity management involves managing an appropriate balance between realising opportunities for gains while minimising adverse impacts. It provides a process for continuous improvement in decision making which in turn drives better performance.
Also, last week we announced a significant re-financing package which will fund our growth and deliver improved returns to shareholders.
This new package increases the Group’s revolving bank credit and guarantee facilities, as well as establishing a new operating lease agreement, comprising $230 million of domestic and US$50 million of international facilities.
In freeing up cash flow, the new package provides Macmahon with the flexibility to consider paying higher dividends or to further explore strategic acquisitions which will add both value and breadth to our business.
Our growth has also led to the need to upgrade our information systems, with the Global Integrated Systems program now underway and scheduled for completion within the next 18 months.
This upgrade will provide a modern Management Information System and improve our business support applications, including human resources, financials, procurement, inventory management, plant maintenance and project management.
So, with these building blocks in place, our task remains to ensure we deliver the benefits to our shareholders.
Monday’s announcement of the Memorandum of Understanding with Leighton is an exciting development that provides added impetus to the growth strategy.
There are considerable key benefits that will flow from this new partnering agreement.
One of the most important is that it allows Macmahon to remain independent and we can continue to pursue our strategic goals.
The partnering agreement will accelerate our growth into large infrastructure projects, for both Design and Construct contracts and Public Private Partnerships.
The focus will be predominantly on the East Coast, although there will be some For personal use only use personal For opportunities overseas.
It also means that we will be able to get into these projects much faster with less risk, due to Leighton’s considerable experience at this level.
The partnering relationship with Leighton will not impact on our existing business but it will deliver access to new business.
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Up until now revenue from large construction joint venture projects has been less than 10 per cent of our annual revenue and this agreement has the potential to significantly increase that contribution during the next few years.
As an added bonus, Macmahon now has a long term, major shareholder that is committed to the Group’s growth strategy.
So, in summary, we have a detailed strategic plan and our growth is being underwritten by managing our business in accordance with that plan.
Before moving to cover the outlook for Macmahon I thought I would take a few minutes to outline some examples of the people and projects that form the foundations of our success.
Firstly, Phase 2 of the underground Argyle Diamond Mine in the Kimberley Region of Western Australia has been a great success. This is a four year contract successfully negotiated by our Mining team, started in November last year and involves over 30 kilometres of underground development.
The rapid deployment of a large team to Argyle was a major accomplishment and now we have more than 300 people on site. This project is the largest underground mine development project being undertaken in Australia at present and our team is delivering excellent results on site.
The next project is the Logan River Catchment Early Works located about 45 kilometres south of Brisbane. Macmahon leads the Water Infrastructure Solutions Alliance, for this two year, $100 million contract for Queensland Water Infrastructure. The project is part of the Queensland Governments significant commitment to increase water storage capacity.
The Alliance will undertake all of the design and construction components for this project which include the Cedar Grove Weir, the Bromelton Offstream Storage facilities and the access road for the proposed Wyaralong Dam.
Our Queensland Construction team which is the same team that delivered the successful Burnett River Dam did an excellent job negotiating this alliance.
One of our undoubted success stories in the last year was the purchase of Australian Raise Drilling (ARD) and Combined Resource Engineering (CRE). ARD and CRE operate as separate entities; both have low ongoing capital requirements, a diversified geographic spread and have broadened our customer base.
CRE is an engineering designer, manufacturer and constructor of mining projects including materials handling systems, process plants, haulage shafts, egress systems and other related works. ARD is the largest raise drilling contractor in Australia and has 12 rigs with the capability to drill short small diameter holes through to large diameter (up to 6m) holes to a depth of 1000m. During its operations ARD has drilled more than 50 kilometres of vertical or near vertical raise holes.
The success of this acquisition is demonstrated by the fact that that 180 employees have For personal use only use personal For joined and stayed with Macmahon and that this acquisition contributed $6.6 million of our EBIT in 10 months of last year.
The next project is the Mitchell Freeway Extension Project in Western Australia.
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The $113 million project for Main Roads WA, awarded in September 2006, involves a four and half kilometre extension of the freeway, including the construction of a railway tunnel and three interchanges, and the relocation of a section of railway.
This project is an excellent example of the way in which we work with the local community to establish strong relationships at each of our projects. Our project team is not only committed to delivering the project safely, on time and on budget but also with minimal impact on the local community.
The creation of a Construction Reference Group, consisting of 14 community representatives, ensured that there was an open process that allowed the local people to discuss all aspects of the project with Macmahon and Main Roads WA.
This project was recently awarded a prestigious Australasian award for outstanding Public Participation Enhanced Decision Making which is a credit to our project team
This commitment to the community is a strong part of our Company culture and is reflected in one of our core corporate values which is to work harmoniously within the communities in which we operate.
Now moving on to our order book, I will run through our score card so far this year. As the Chairman mentioned the order book at the end of June 2007 was a record $2 billion.
Since 30 June we have had further success with our order book including:
- the $75 million Saraji Coal Mine stripping contract for BMA in Queensland;
- an additional $40 million of construction contracts for Rio Tinto Iron Ore at the Cape Lambert port; and
- a number of new smaller construction contracts and extensions to mining contracts totalling $100 million.
In addition, today we have announced a new overseas contract for our Mining Business in the Northern Sumatra province of Aceh, Indonesia with a value of US$60 million.
This ten year contract at Lhoknga involves the preparation and open pit mining of limestone to feed the cement plant.
Lhoknga is owned by PT Semen Andalas Indonesia, a wholly owned subsidiary of Lafarge, the world’s largest cement manufacturing group with operations in more than 75 countries.
Lafarge is a very important customer and we are excited about the opportunity to commence a new project with them
So all together in the past four months we have secured an additional $280 million of new contracts and contract extensions and our order book remains at a healthy $2 billion. For personal use only use personal For Our Mining Business is also currently finalising two contracts which will further boost our order book in the next month. These contracts are:
- a mining contract with Jubilee Mines to develop and manage the open cut and underground operations at the new Sinclair Mine, located approximately 300 kilometres north of Kalgoorlie, in the Goldfields Region of Western Australia; and
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- an 18 month extension to our large Olympic Dam underground development contract in South Australia.
I will now move to our Business Outlook which remains very positive.
Within the Mining Business we have held many contracts for long periods of time. This provides a solid platform from which to offer a range of additional services to our customers.
The prospects for winning contracts on new projects in the mining sector remain strong, with opportunities in coal, iron ore and base metals. Our main focus at present is to pursue larger contracts with commencement dates that are six to twelve months away.
In our Construction Business we are continuing to target new work however, we are also preparing to undertake the major projects we have recently been awarded.
The Jilalan Railyard Upgrade, the Hale Street Link and the Kingsgrove to Revesby Quadruplication projects will all commence in the second half of this financial year.
As these projects get bedded down, we will increase our focus on tendering for new work. Again these new projects will take some time to be assessed and are likely to commence anywhere from six to twelve months after the tenders are submitted.
The partnering relationship with Leighton will mean that we will now start looking at bigger projects and some of these have already been identified.
In Western Australia, the number of opportunities to participate in infrastructure projects and iron ore expansion continues to grow however, we still believe Queensland and New South Wales will deliver the greatest growth for this part of our business.
Having established a good foothold in the East we are more visible and therefore, well placed to win an increased percentage of larger contracts in this market.
From the work already completed this year and our existing order book we now have some $1.1 billion locked away for 2008.
With this solid base so relatively early in the year, we are confident that we can deliver at least $1.25 billion for 2008, which will be a 30 per cent increase on 2007. As we have previously outlined the second half revenue will be stronger than the first as new projects ramp up
Our first half revenue will be around $600 million which is a significant increase from the $488 million we achieved in the June half. All of the increase in revenue is flowing from our Construction business which is starting to benefit from its contract wins. Mining revenue is relatively flat with increases from new work being offset by customer imposed waste stripping constraints at our large Eaglefield coal mine in Queensland.
The impact of the ramp up of construction contracts and the production constraints at Eaglefield will result in first half EBIT margins being below 6 per cent with improvement For personal use only use personal For anticipated in the second half. The full year target EBIT margin remains at 6 per cent.
Overall we remain confident of a 30 per cent increase in after tax profit for 2008.
Looking further out, our revenue and profit growth targets remain at 20 to 30 per cent per annum.
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The next few years for Macmahon looks like they will be just as exciting as the past three, as we continue to strive for new records.
The most important thing I want to do today is to thank the management and employees of our company. Without the dedication of our people the outstanding success we continue to achieve would simply not be possible.
So my thanks goes to everyone at Macmahon. You are entitled to feel very proud of your effort, because you are the driving force behind our tremendous growth and the delivery of increased returns to our shareholders.
I will now hand back to Dick, who will conduct the remaining business of the meeting.
Thank you. For personal use only use personal For
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