Thank you for standing by, and welcome to the Macmahon Limited 2021 Half-Year Results Presentation. All participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Mick Finnegan, Managing Director and Chief Executive Officer. Please go ahead. We appear to be having some issues at this time. Please stand by. We'll get the speaker.
Bernadette, we're back on. We can hear you now.
Please go ahead.
Thanks, Bernadette. We'd like to welcome and thank you, everyone, for joining us today for Macmahon's 2021 Half-Year Results Presentation. My name's Mick Finnegan, I'm the CEO of Macmahon. With me today for the first time on a results call is our new CFO, Peter Pollard, who joined us in August last year. I'm also joined by the company's Investor Relations Manager, Chris Chong. I know everyone's really busy. It's a busy time of year. We'll go through the presentation, hit the high points. Then at the conclusion, open up to questions. I'll start with an overview of the half, shown on Slide two. In our ASX 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 EBIT(A), 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 wellbeing of our people from COVID-19. Importantly, our cash generation remains strong, with operating cash flow growing by 7%, which outpaced both EBITDA and EBIT(A) growth. The business generated nearly AUD 100 million in operating cash flow in the six-month period. Macmahon achieved this growth in earnings and cash flow on a slightly lower revenue base. Revenue was down around 5% on the same period last year, primarily due to an accounting change at Batu Hijau as a result of COVID-19. We've had to change how we record revenue associated with tires and lubricants.
COVID-19 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, EBIT(A) has been unaffected. Peter will talk a bit more about this in the financial discussion. Our NTA position strengthened in line with our earnings to almost AUD 0.23 per share, and our return on average capital employed and return on equity remains strong at 13.5% or 13.4%, and 12%, respectively. The solid performance and outlook has allowed us to increase the interim dividend by 20% to AUD 0.003 per share. The Batu Hijau revenue change will also be relevant for our second half, so we've revised our FY 2021 revenue guidance range to AUD 1.3 billion-AUD 1.4 billion, down from AUD 1.4 billion-AUD 1.5 billion at the start of the financial year.
Our full-year revenue is underpinned by AUD 1.3 billion of secured work for FY 2021. As mentioned, these revenue changes don't impact our earnings, so our FY 2021 EBIT(A) guidance remains unchanged at AUD 90 million- AUD 100 million. In the first half, the higher AUD to USD exchange rate impacted our EBIT by about AUD 800,000. Our guidance is now based on a higher FX assumption of AUD 0.75 versus what was previously AUD 0.72. Our forward order book as of today is now around AUD 4.2 billion, and this reflects the changes to revenue recognition at Batu Hijau and includes our preferred contract status at Warrawoona, and I'll talk more to the order book later in the presentation. Turning to slide three, 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 with 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 Byerwen and Batu Hijau, and we've also had a renewed focus on winning new work. Contracts of note that we can mention here today include the AUD 250 million contract at the Foxleigh project, which has started in recent dates and will ramp up in the coming weeks, and the civil contract at Strandline's Coburn Mineral Sands project.
We've also been appointed preferred at the Calidus Warrawoona Gold Project, which has an estimated value of about AUD 220 million. 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 Shaker project at Tropicana. We secured a four-year contract extension at Silver Lake's Deflector project, along with new work at Bellevue and Pantoro. The acquisition of GBF continues to deliver benefits for Macmahon, not just by increasing our diversity of work and reducing our capital intensity, but also allowing us to seriously target multi-discipline projects. I've already touched on our FY 2021 guidance and also on COVID. I'll talk more about our order book a bit later.
We do continue to see a robust tender pipeline with over 20 credible opportunities for Macmahon, worth over AUD 7 billion, including AUD 3.8 billion in tenders either submitted or being completed as we speak here today. Turning to slide four 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. We cannot take this for granted, clearly. An area where we are paying a lot of attention is the recent increase in our TRIFR. 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 referred to COVID upfront, which is front of mind for us all, and I'll 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 this going forward. The drop in total workforce numbers reflects a reduction in contractors at the Batu Hijau site that now are contracted directly to AMNT.
Finally, diversity is very important to our business, and we continue to increase this where we can. We've been making good progress, in particular, in areas of indigenous and gender participation. Moving on to slide five, which you may be familiar with. I'll leave you to read through the detail in the slide, but will 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. 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 two important contracts. Firstly, at Deflector, we are very pleased to have secured a four-year extension here.
This contract is an important milestone in our strategy to expand our underground business, 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, we look forward to building on this momentum. Secondly, I'd like to talk about Batu Hijau, which is one of our cornerstone projects. Moving to slide six, we've provided an overview of this world-class project and contract. We're very fortunate to be mining at the Batu Hijau copper gold mine in Indonesia. This is a large resource, it's positioned in the first quartile of the global copper cost curve. Since we commenced working on this site over three years ago, I'm pleased to be able to say the alliance team has achieved all it set out to do and more, including achieving world-class productivities.
We are happy to report that AMNT will be undertaking another significant cutback at the Batu Hijau 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 six 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've seen a version of slide eight 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. You can see the half-on-half performance, in particular, the business has consistently maintained EBIT(A) margins, which are now above 7%. Similarly, slide nine shows our historic revenue and EBIT(A) track record compared to our market guidance at the time. As Mick pointed out, we have revised our revenue guidance for FY 2021 due to the accounting change at Batu Hijau, but we continue to have good earnings visibility, and our EBIT(A) guidance remains unchanged at AUD 90 million-AUD 100 million.
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 Batu Hijau, as Mick touched on earlier. The change in accounting treatment relates to the recording of revenue and costs on certain consumable items. Macmahon's control over the movement of tires and lubricants was restricted due to COVID-19, and under the consistent application of AASB 15, 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 Batu Hijau, first half 2021 revenue grew approximately 3% across the remainder of the business.
Earnings growth remained positive with the underlying EBITDA and EBIT(A) up 6% and 5% respectively. This was driven by a combination of organic revenue growth, excluding the Batu Hijau adjustment, and solid operational performance. Group margins were higher given the lower headline revenue with the EBIT(A) margin back over 7%. Reported NPAT was up 56%, largely due to a one-off tax benefit following the recognition of a AUD 17.9 million 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 2022. What this means going forward is that our headline P&L effective tax rate will now be closer 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 AUD 68.1 million -AUD 129 million. The company generated AUD 97 million in operating cash flow, up 7% on the prior corresponding period, representing a cash conversion rate of around 80% on underlying EBITDA of AUD 121 million. 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 AUD 138.9 million in the half. We've increased our FY 2021 CapEx guidance from AUD 175 million to AUD 230 million, which is largely Foxleigh.
Our sustaining CapEx remains unchanged at AUD 95 million, which is low versus depreciation, primarily due to AMNT paying sustaining CapEx on the Batu Hijau plant. We've also split our CapEx further by extension and growth projects, with around AUD 40 million expected to be spent on extensions and AUD 95 million 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 0.5 x. Our current cash and available facilities total approximately AUD 255 million, we have refinanced our existing debt facility to AUD 170 million for another two 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 AUD 68 million 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 Foxleigh 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 good earnings visibility remain a priority for the company. Mick 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 AUD 0.003 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%-25%. I'll now hand back over to Mick 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 AUD 7 billion tender pipeline. We also continue to develop a clear technology and sustainability roadmap 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. 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-19 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 now have a renewed focus on attracting, retaining, and developing skilled staff, particularly in Western Australia. As I've 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 internally 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. 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 wisely 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 wellbeing, and climate change.
More detail on these are provided in our appendix. We are 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 Mines 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 is 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 QCoal, Ca$hEd Up program in Queensland and supporting many local community sporting groups. Separately, we are proud of some of the indigenous engagement initiatives we are undertaking.
Notably, the traineeship program we offer to the Jangga people in partnership with our client, QCoal, was recognized at the Queensland Resources 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 AUD 4.2 billion, excluding the impact of the Batu Hijau revenue adjustment. Of late, we've had some great success in growing and diversifying our order book. In the first half of FY 2021, we secured AUD 320 million of new work, which included Foxleigh, and we're also appointed the preferred contractor for the Warrawoona gold project, where we are working exclusively to finalize the scope, the methodology, and the contract. Early this year, we were pleased to be awarded the Deflector Underground Extension. All of this combined results in approximately AUD 760 million of new work and exceeds half one 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. It's important to call out here that we are well progressed in finalizing a commercial model for the significant cutback at Batu Hijau with AMNT called Phase 8. This increased scope will extend the current in-pit mining activities by another six 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 EBIT(A) percentage margins but report lower headline revenue numbers in our P&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 project awards, there remains a strong new work pipeline of opportunities for Macmahon, as you can see on slide 19. These total around AUD 7 billion, of which AUD 3.6 billion relates to new clients. AUD 1.2 billion are 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. In closing, I'd like to acknowledge 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-19, 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. I've absolute confidence in the group of people who are now seeing 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. Macmahon is now a more diverse, less capital-intensive business with greater scale that can serve its clients through the lifecycle of their mining operations.
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 you. If you wish to ask a question please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request please press star two. If you're on a speakerphone please pick up the handset to ask your question. Your first question comes from Ben Brownette from CLSA. Please go ahead.
Hi, Mick. A few people have come through this morning just, I guess, a little bit unhappy about, not unhappy, but a little bit surprised with some of the CapEx. In terms of the extension and the growth and what that's meant for free cash flow. Is there anything you can say about returns on that growth CapEx that you're expecting, and then 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 the 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?
Yeah, for sure, Ben. Look, the growth CapEx that's outlined and what we've guided for the full year will bring with it in the region of AUD 1.3 billion - AUD 1.4 billion of revenue of new work. If you tie to 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. For us, we see this year as clearly a growth year with the opportunities that are out there. 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.
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. That's something that isn't lost on us. 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 achieve at least that 15% return on average capital employed. Maybe just to wrap it up.
Longer-term, part of our strategic plan is to reduce the capital intensity of the business, and there's a combined series of actions it will take to do that, and it 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. 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 those controls are in place, and that rigor goes around all of those tenders.
Yeah, okay. 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?
Yeah. Look, the underground in there is about AUD 1.3 billion at the moment. 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. 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.
Yeah, okay. Pete, can I ask on slide 12 where you talk about the cash flow waterfall, and then you mentioned your numbers. They're obviously just your gross numbers. In the cash flow, when you think about CapEx, you've got some cash CapEx and then some leases. Can you just help understand in terms of what the cash impact is on the full year guidance of CapEx and how much of that will be leases?
Um-
So I imagine-
Ben, look,
Just in terms of just balancing out, you've got AUD 100 million in the first half here of payments for PPE, and then there's AUD 138 million. I'm imagining the difference is leases. Is that the way to think about it?
Absolutely.
Yep.
Okay. When you give the guidance for CapEx, that again, is going to be a gross number?
Yes. Correct.
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?
Oh, absolutely.
Not how you model it, right? Not how it sort of turns up in the financial statements.
Yeah, that's right. It's your traditional formulas. It's not the cash exactly. I absolutely would look at it the way you just outlined.
Yeah. Right. Just confirming then, the AUD 95 million is unchanged, that's understood. Then you've got what? AUD 135 million of CapEx, and that will be a mixture of cash payments and leases.
Correct. That will depend on the mix of plant, depending on the project. Some of it could be leased and some of it could be cash, and that will need to play out based on the mix of plant.
Okay. Just going back to what you were saying on tax. The full year tax rate, you're saying, should be around about 30%, but 15% cash. What does it look like going forward?
Well, for the next couple of years, we would expect it's gonna be around 2021, 2022, it'll be around 15%. That is a combination of Indonesia and Australia. Clearly with the change in tax laws last year, and we get a big benefit with the deferred tax liability for the next two years, which also allows to bring on a deferred tax asset, which has been sitting off our books. It will be an effective tax rate across the two, well, Indonesia and Australia, cash tax rate of around 16.5%. Correct.
The P&L tax will be 30%.
Correct.
Okay. Yeah, thanks very much for that.
Thanks, Ben.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. 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 one-on-one 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.