Thank you for standing by, and welcome to the McMahon Limited 20 21 Half Year Results Presentation. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Mick Finnegan, Managing Director and Chief Executive Officer.
Please go ahead.
Bernadette, we're back on. We can hear you now. Thanks, Bernadette. Look, we'd like to welcome everyone and thank everyone for joining us today for McMahon's 20 21 half year results presentation. My name is Mick Finegan.
I'm the CEO of McMahon. And with me today for the first time on the results call is our new CFO, Peter Pollard, who joined us in August last year, and I'm also joined by the company's Investor Relations Manager, Chris Chong. Look, I know everyone's really busy, and it's a busy time of year. So we'll go through the presentation, hit the high points and then at the conclusion, open up to questions. So I'll start with an overview of the half shown on Slide 2.
In our ASICS announcement today, we said we increased our earnings and cash flow on slightly lower revenue. You can see here that we delivered growth across all earnings measures shown underlying EBITDA, underlying EBITDA and reported NPAT. This positive earnings performance is particularly relevant given the ongoing disruptions to the business and the risks posed to the health and well-being of our people from COVID-nineteen. Importantly, our cash generation remains strong with operating cash flow growing by 7%, which outpaced both EBITDA and EBITDA growth. The business generated nearly $100,000,000 in operating cash flow in the 6 month period.
McMahon achieved this growth in earnings and cash flow on a slightly lower revenue base. Revenue was down around 5 percent on the same period last year, primarily due to an accounting change at Barahijaya as a result of COVID-nineteen. We've had to change how we record revenue associated with tires and lubricants. COVID-nineteen has resulted in restrictions on the movement of these consumables, which means under accounting standards, they have not been included in the group revenue or costs. Given there's no margin attached to these pass through costs, EBITDA has been unaffected.
Peter will talk a bit more about this in the financial discussion. Our NCA position strengthened in line with our earnings to almost $0.23 per share, and our return on average capital employed and return on equity remained strong at 13.5 or 13.4% 12%, respectively. The solid performance and outlook has allowed us to increase the interim dividend by 20% to $0.03 per share. The Barahijao revenue change will also be relevant for our second half. So we've revised our FY 'twenty one revenue guidance range to $1,300,000,000 to $1,400,000,000 down from $1,400,000,000 to $1,500,000,000 at the start of the financial year.
Our full year revenue is underpinned by $1,300,000,000 of secured work for FY 'twenty one. As mentioned, these revenue changes don't impact our earnings, so our FY 'twenty one EBITA guidance remains unchanged at $90,000,000 to $100,000,000 In the first half, the higher AUD to USD exchange rate impacted our EBIT by about $800,000 Our guidance is now based on a higher FX assumption of $0.75 versus what was previously $0.72 Our forward order book as of today is now around $4,200,000,000 and this reflects the changes to revenue recognition at Barahicea and includes our preferred contract status at Werrawuna, and I'll talk more to the order book later in the presentation. Turning to Slide 3. I'd like to point out some of the key operational achievements during the half. I already mentioned the headline revenue and earning numbers, but it's also worth noting that we finished the half year in a strong financial position, the gearing at 20% and net debt to annualized EBITDA of 0.5x.
The surface mining division continued to perform well with record production volumes at both Byron and Barahijaya, and we've also had a renewed focus on winning new work. Contracts of note that we can mention here today include the $250,000,000 contract at the Foxley project, which has started in recent days and will ramp up in the coming weeks and the civil contract at Streamline's Coburn Mineral Sands project. We've also been appointed preferred at the Caladas Warrawuna gold project, which has an estimated value of about $220,000,000 Separate to that, our underground division has performed well, safely completing winding and shaft engineering activities at Olympic Dam and successfully ramping up the Boston Shaga project at Tropicana. In addition, we secured a full year contract extension at Silver Lake's Deflector project along with new work at Bellevue and Pentaloro. The acquisition of GBF continues to deliver benefits for McMahon and not just by increasing our diversity of work and reducing our capital intensity but also allowing us to seriously target multidiscipline projects.
I've already touched on our FY 'twenty one guidance and also on COVID, and I'll talk more about our order book a bit later. However, we do continue to see a robust tender pipeline with over 20 credible opportunities for McMahon worth over $7,000,000,000 including $3,800,000,000 in tenders either submitted or being completed as we speak in May. Turning to Slide 4 on people and sustainability. It goes without saying that safety remains a core priority for the management team and for the business as it always will. The low LTI frequency rate is something we are proud of and indicates a strong underlying safety culture.
However, we cannot take this for granted clearly. An area where we are paying a lot of attention is the recent increase in our Trifa. And while the trend indicates the increase is in lower severity incidents, the management team is taking this very seriously and implementing various initiatives to address it. I'll refer to COVID upfront, which is front of mind for us all, and I would just add here that we continue to implement strict practices and protocols to protect our people and our operations. We have been doing more work on sustainability and have recently completed an ESG materiality assessment, which will provide input into our future strategy development in this area.
Our employee numbers have stabilized since the recent peak, but we expect this to grow again as we start up our new contracts. We are cognizant of the increasing demand for skilled mining labor in Australia and have put in place various training and recruitment programs to manage these going forward. The drop in total workforce numbers reflects a reduction in contractors at the Barahijao site that now are contracted directly to IMNT. And finally, diversity is very important to our business, and we continue to increase this where we can. We've been making good progress in particularly in areas of indigenous and gender participation.
Moving on to Slide 5, which you may be familiar with. I'll leave you to read through the detail in the slide, but we'll reiterate the majority of our major surface contracts are long term alliance or life of mine style contracts, which operate in the bottom half of the global cost curve. And it is this that underpins the longer term sustainability of our business. I won't go through all the detail, but I would like to take the time to touch on 2 important contracts. Firstly, at Deflector, we are very pleased to have secured a full year extension here.
This contract is an important milestone in our strategy to expand our underground business, and it is clear and it is a clear demonstration of the benefits we are now realizing from the GBF acquisition. Our underground business has grown significantly in recent times, and we look forward to building on this momentum. And secondly, I'd like to talk about Barahijia, which is one of our cornerstone projects. So moving to Slide 6, we've provided an overview of this 12 class project and contract. We're very fortunate to be mining at the Barahijia copper gold mine in Indonesia.
This is a large resource and is positioned in the 1st quarter of the global copper cost curve. Since we commenced working on this site over 3 years ago, I'm pleased to be able to say the Alliance team has achieved all it's set out to do and more, including achieving world class productivities. We are happy to report that IMMC will be undertaking another significant cutback at the Bararigio pit called Phase 8, which was not contemplated when they first purchased this mine in 2016. The Phase 8 scope will extend our in pit mining activities by another 6 years. I'd now like to hand over to Peter to run through the financials for the half.
Thanks, Mick. Good morning, everyone, and thank you for taking the time to join us today. You have seen a version of Slide 8 before, and I'll only briefly touch on it. It highlights the company's ability to deliver sustained earnings growth. The dark blue columns are the first half numbers and the light blue columns are the second half.
So you can see the half on half performance, in particular the business, has consistently maintained EBITDA margins, which are now above 7%. Similarly, Slide 9 shows our historic revenue and EBITDA track record compared to our market guidance at the time. As Mick pointed out, we have revised our revenue guidance for FY 'twenty one due to the accounting change at Batu Hijao, but we continue to have good earnings visibility and our EBITA guidance remains unchanged at $90,000,000 to $100,000,000 Turning to our profit and loss statement on Slide 10. I'd like to talk to some of the key factors driving the numbers in the half. Revenue was down 5% and this was due to the accounting treatment at Babuhegia as Mick touched on earlier.
The change in accounting treatment relates to the recording of revenue and costs on certain consumable items. McMahon's control over the movement of ties and lubricants was restricted due to COVID-nineteen. And under the consistent application of AAS B15, the company has not recorded these consumables as either revenue or cost. As these items are passed through at cost with no margin attached, I'd emphasize that the earnings were not impacted due to the change in treatment. Excluding the impact of Batuhedral, first half '21 revenue grew approximately 3% across the remainder of the business.
Earnings growth remained positive with the underlying EBITDA and EBITA up 6% and 5%, respectively. This was driven by a combination of organic revenue growth, excluding the Barahijo adjustments and solid operational performance. Group margins were higher given the lower headline revenue with the EBITA margin back over 7%. Reported NPAT was up 56%, largely due to a one off tax benefit following the recognition of a $17,900,000 deferred tax asset. This resulted from the change in Australian tax legislation in October budget, which provides an incentive to fully expense investment in new Australian CapEx through to FY 'twenty two.
What this means going forward is that our headline P and L effective tax rate will now be close to 30%. However, our effective cash tax rate will still be around 15%.
Slide 11
is self explanatory, but it does highlight improving diversification of our client, country and activity mix, which is consistent with our longer term strategy. The cash flow net debt waterfall on Slide 12 shows the movement in net debt over the period, which increased by around $68,100,000 to $129,000,000 The company generated $97,000,000 in operating cash flow, up 7% on the prior corresponding period, representing a cash conversion rate of around 80% on underlying EBITDA of $121,000,000 The working capital movement you see is related to a timing difference in the receivables and payments. We are looking at various initiatives to optimize our working capital, both in Australia and Indonesia. CapEx, again, was the major cash outflow, which was 138.9 in the half. We've increased our FY 'twenty one CapEx guidance from 175,000,000 to 230,000,000 which is largely Foxley.
Our sustaining CapEx remains unchanged at $95,000,000 which is low versus depreciation primarily due to AMMT paying sustaining CapEx on the Batuheja plant. We've also split our CapEx further by extension and growth projects with around $40,000,000 expected to be spent on extensions and $95,000,000 on growth. Moving on to our balance sheet, which is on Slide 13. The balance sheet remains in a strong position to fund growth with gearing at 20% and net debt to annualized EBITDA around 0.5x. Our current cash and available facilities totaled approximately CAD 255 1,000,000 and we have refinanced our existing debt facility to $170,000,000 for another 2 years at attractive terms.
As many of you would know, the majority of our debt is in equipment finance leases with bank finance only around $68,000,000 of our total debt. Return on average capital employed was a solid 13.4%. However, it was impacted by the timing of new CapEx and subsequent commencement of new work. For example, we've incurred Foxley CapEx, which has only just commenced ramping up. We expect an average return on average capital employed of 15% over the long term, which is in line with our strict capital management hurdles.
Finally, I'd like to finish off with some more comments on our capital allocation shown on Slide 14. Maintaining a healthy cash flow, a strong balance sheet and having a good earnings and having good earnings visibility remain a priority for the company. Nick will talk about the strong tender pipeline going forward, and the company is well positioned to capitalize on this with the current headroom we have in the balance sheet and the good earnings and cash generation from our existing projects. The positive earnings growth, combined with our balance sheet position, cash flow and outlook, supports the payment of a 20% increase in the interim dividend of $0.03 per share. This represents a 21% payout ratio on underlying earnings per share, which is in line with the company's current dividend policy payout range of 10% to 25%.
I'll now hand back over to Nick to discuss our strategy and outlook before opening to questions.
Thanks, Peter. Our strategy remains unchanged, which has provided a stable platform to grow the business and drive value for our shareholders. We continue to work on our core priorities and have made good progress as we've successfully grown our civil and underground businesses. We have positioned the company to capitalize on the over $7,000,000,000 tender pipeline. We also continue to develop a clear technology and sustainability road map to lay strong foundations for the future.
You're no doubt familiar with how we want to build out the business across the mining value chain and our strategic focus areas. So I'll instead talk about our strategic priorities over the coming half. These are focused around execution in what is no doubt an uncertain environment, technology, sustainability and strategically aligned new work. The COVID environment does remain fluid and continues to impact our business operations as it does for our peers and other industries. The focus and commitment required to deliver the results we have highlights the capability of our amazing team.
Our priority remains the safety and well-being of our people, and we will continue to work closely with our clients to ensure this is successfully achieved. We have a we now have a renewed focus on attracting, retaining and developing skilled staff, particularly in Western Australia. As I touched on earlier, we have various initiatives we've invested in that are now gaining traction. Thankfully, a number of our peers and clients are doing the same thing. And if we all continue to act responsibly, the industry could turn this into a positive, particularly in WA as it becomes more self reliant.
The focus for our innovation journey in Townley has visibly shifted to operational technology, following the investment and progress made in implementing our new ERP and digital spine over the last few years. Our broader team understand the importance of this initiative and are focused on extracting value from this investment in the field. And finally, we completed an ESG materiality assessment in December with our key stakeholders to determine the most material topics we should concentrate on. The outcome was a prioritized set of next steps, which will ensure any time or investment is widely spent and creates value, and I'll talk a bit more to that on the next slide. This slide covers our recent ESG achievements and focus.
I won't go through all the initiatives. However, we've identified 15 material topics, the key ones being corporate governance, safety, health and well-being and climate change. So more detail on these are provided in our appendix. We're already well on the journey to addressing and improving our disclosure on these material topics and remain focused on building a more sustainable business for all of our stakeholders. A good example is our award winning Strong Minds, Strong Minds program.
This program is focused on the physical and mental well-being of our people, which is very important to me personally and us as a business. This program is now being rolled out to the wider industry, which is fantastic news. Additionally, it's important to us that the communities where we work are better for us having been there. We do this in many ways, and some examples include the Cucall Cashed Up Kids program in Queensland and supporting many local community sporting groups. Separately, we're proud of some of the indigenous engagement initiatives we're undertaking.
Notably, the traineeship program we offered to the Janga people in partnership with our client, Kyukol, was recognized at the Queensland Resource Council Indigenous Awards in late 2020. Slide 18 shows our order book and the key movements in the period. The order book as at 31 December was $4,200,000,000 excluding the impact of the Barahigio revenue adjustment. Of late, we've had some great success in growing and diversifying our order book. In the first half of FY 'twenty one, we secured $320,000,000 of new work, which included Fox Lake.
And we're also appointed the preferred contractor for the Werrawena Gold Project, where we are working exclusively to finalize the scope, the methodology and the contract. Then early this year, we were pleased to be awarded the Deflector Underground Extension. All of this combined results in approximately $760,000,000 of new work and exceeds half run revenue. Please note that the order book does not include civil and underground churn work, which is in addition to this total. The strong order book, particularly for the coming year, provides us with the confidence in our earnings guidance and continued earnings growth.
I'll talk about the tender pipeline shortly, but it's important to call out here that we are well progressed in finalizing the commercial model for the significant cutback at Barahigio with AimingIT called Phase 8. This increased scope will extend the current in pit mining activities by another 6 years from 2022 to 2028. As we noted in our ASX release today, as part of the Phase 8 discussions, we are working towards the removal of certain pass through costs on which no margin is earned. If finalized, this change will improve working capital, tax efficiency and reduce our FX exposure. As earnings are not impacted by this, we will expect further rises in EBITDA percentage margins but report lower headline revenue numbers in our P and L and our forward order book.
We will provide further information on this when we finalize the arrangement for the Phase 8 scope. Even after these recent projects project awards, there remains a strong new work pipeline of opportunities for McMahon, as you can see on Slide 19. These total around $7,000,000,000 of which $3,600,000,000 relates to new clients, dollars 1,200,000,000 related to underground projects, with the majority based in Australia. Pleasingly, there are a number of opportunities where we feel our competitive advantage positions us well. Our ability to service both surface and underground mining concurrently at the same site is a competitive advantage, and there are a number of opportunities in this pipeline that require this complementary skill set.
When you combine our significant order book and tender pipeline, we're in a very healthy position to deliver continued growth over the coming years. And importantly, it's in areas strongly aligned with our strategic plan. So in closing, I'd like to acknowledge all the work of our amazing all the work our amazing team have done in maintaining our earnings growth in what can only be described as a challenging market, but more importantly, for positioning the company to continue this performance going forward. I talked about our long term priorities for the group in the body of the presentation, but specifically outlined here are the focus areas for the remainder of this financial year. This includes a continued focus on managing the potential impacts of COVID-nineteen, efficiently delivering our work in hand and winning strategically aligned new work.
The outlook remains optimistic with strong commodity prices, good access to capital for mining companies and a healthy pipeline of opportunities. At the same time, the challenge remains in managing the cost base and ensuring we have access to labor and capital as we grow. But I've absolute confidence in the group of people in our team to achieve this. They've certainly had a track record of pulling together when the going gets tough. I'm genuinely excited about where we see this business heading, particularly with the recent momentum in the underground sector.
McMahon is now a more diverse, less capital intensive business with greater scale that can serve its clients through the life cycle of their mining operations, and we're well positioned with a solid balance sheet to take advantage of the various opportunities in front of us. Now with that, I'd like to hand back to Bernadette to open the call for questions.
Thank Your first question comes from Ben Brownert from CLSA. Please go ahead.
Hi, Mick. A few people have come through this morning just, I guess, a little bit unhappy about or not unhappy, but a little bit surprised with some of the CapEx. So in terms of the extension and the growth and what that's meant for free cash flow. So is there anything you can sort of say about returns on that growth CapEx that you're expecting and margins? And then and margins?
And then you've obviously given guidance, but just around not only what you've spent in the half, but what you intend to spend in second half and then going forward on new contracts and exactly maybe where those margins or returns fit on what you're looking at compared to what you've got?
Yes, for sure, Ben. Look, the growth CapEx that's outlined in what we've guided for the full year will bring with it in the region of $1,300,000,000 to $1,400,000,000 of revenue of new work. So if you're tired of that, that 8% EBIT that we say we should be and the 15% return on capital, you can work out what it delivers for the business. Some of it's incremental growth year on year. Some of it's growth at the back end of the current order book.
But for us, we see this year as clearly a growth year with the opportunities that are out there. And our aim is to be a meaningful player in this sector, and the opportunities out there do strategically align with our longer term plan, which is having that long term tenure and that 15% return on average capital growth. I mean, if you look at our business at the sustaining CapEx level, there's a significant amount of free cash flow that will fall out of the business when we're in that steady state phase. So that's something that isn't lost on us. And we have extremely strict hurdles in every tender about ensuring that over the tenure of that tender, not the life of the plant, that tender, we achieved at least a 15% return on average capital employed.
And maybe just to wrap it up, longer term, part of our strategic plan is to reduce the capital intensity of the business and that's there's a combined series of actions that we'll take to do that and includes looking at the adjacent services and building up the underground, building up the civil and the engineering skills that we have in the business, but it's also those extensions because they're typically not a dollar for dollar CapEx compared to a new job and obviously better utilizing the assets that we have. So we know the free cash flow is important to people, but we know the growth is too, and it's just incumbent on us to ensure we've got the discipline that every dollar spent attracts that annual 15% return on capital and that those controls are in place and that rigor goes around all of those tenders.
Yes, okay. And then while you're talking about tender pipeline, can you just give us a little bit more color on what some of these jobs are in terms of where they're located, east west or overseas and commodity, surface and underground? Just anything you can tell us?
Yes. Look, the underground in there is about $1,300,000,000 at the moment, and there's some I suppose since we put that together, a couple have come into the pipeline. Obviously, we're all about building that brand and capability in a steady and sensible way. The majority of that work that's in that pipeline is Australian based, and it's your typical largely gold, copper, hard rock. There's a big bunch of it in WA.
And excitingly, for us, there's a number of opportunities there where it's underground and surface. And in some cases, civil, underground and surface or underground and engineering, which is all part of the longer term strategy for us, which does tie to your original question a little bit too.
Yes. Okay. And then, Pete, can I ask on Slide 12, where you talk about the cash flow waterfall? And then you mentioned your numbers. So they're obviously just your growth numbers.
And then in the cash flow, when you think about CapEx, you've got some cash CapEx and then some leases. So can you just help understand, so in terms of what the cash impact is on the full year guidance of CapEx and how much of that will be leases? Just in terms of just balancing out, you've got $100,000,000 in the first half here of payments for PPE, And then there's 138,000,000. So I'm imagining the difference is leases. Is that the way to think about it?
Absolutely. Yes.
Okay. And so when you give the guidance for CapEx, that again is going to be a gross number?
Yes. Correct.
And so in thinking about free cash flow, if you think about it as operating cash flow less CapEx, should we be thinking about that gross number you're talking about in the slide? Not how you model it, right? Or not how you and not how it sort of turns up in the financial statements?
Yes. That's right. And it's your traditional formulas. It's not the cash exactly. So I absolutely would look at it the way you just outlined.
Right. So just confirming then, so the €95,000,000 is unchanged. That's understood. And then the you've got, what, €135,000,000 of CapEx and that will be a mixture of cash payments and leases?
Correct. And that will depend on the mix of plant, depending on the projects. So some of it could be leased and some of it could be cash and that will need to play it based on the mix of plant.
Okay. And then just going back to that what you were saying on tax. So the full year tax rate you're saying should be around about 30% but 15% cash? And then what does it look like going forward?
Well, for the next couple
of years, we would expect it's going to be around 2021, 2022, it will be around 15%. And that is a combination of Indonesia and Australia. I mean clearly, with the change in tax laws last year, we get a big benefit with the deferred tax liability the next 2 years, which also allows us to bring on a deferred tax asset, which has been sitting off our books. So it will be an effective tax rate across the 2 well, Indonesia and Australia of around cash tax rate of around 16.5%, correct.
The P and L tax will be 30%?
Correct.
Okay. Yes, thanks very much for that.
Thanks Ben.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Finnegan for closing remarks.
Thanks, Bernadette. We really appreciate everyone's time. As I said at the start, I know it's incredibly busy period. I know we're catching up with a lot of people 1 on 1 over the next couple of weeks. But if anyone isn't on that list and would like to catch up, please give Chris a call.
We'd love to see everyone. Appreciate everyone's support, and we'll speak to you over the coming weeks and beyond.
That does conclude our conference for today. Thank you for participating. You may now disconnect.