Penguin Solutions, Inc. Price & Performance (PENG)

Thank you. Good morning and welcome to the SGH SGH year results presentation for the six months ended thirty one December twenty twenty four. I am Ryan Sokes, MD and CEO of SGH. Joining me today is our CFO, Richard Richards. Slide two. SGH is a leading ASX-one hundred diversified operating business. We own and operate market leading industrial services businesses, with additional exposure to energy and media. We deploy incremental capital domestically towards industrial and energy opportunity. Our approach to capital allocation is complemented by a disciplined operating model that prioritizes customer [indiscernible] Accountability. Our owners mindset approach guides decision making and promotes a performance culture. It also drives a strong belief in the power of continuous improvement, and long term value creation. These core values and strategies have supported our ability to deliver long term outperformance, including a 19% EBIT CAGR over the past decade and consistently top decile of total shareholder returns. Slide three. The half year result delivered revenue and earnings growth. Revenue of $5,500,000,000 was up 2%. Led by capital sales and services growth at Westrack. Of $843,000,000 was up 10% driven by earnings expansion across West Track, Borrell and Beach. NPAT, of $5.00 $8,000,000 was up 7% with EBIT growth, partially offset by higher interest and tax payments.

Operating cash flow of $821,000,000 was up reflects stronger earnings along with a 6% improvement in EBITDA cash conversion to 75% largely driven by Westrack. The strong half year result and long term outperformance underpinned by our purpose objective and values, and the disciplined application of our operating model. Our purpose is to recognize and serve exceptional businesses while delivering sustainable value creation and maximizing returns for our stakeholders. This purpose is guided by our four core values respect, owners, minds, and courage and agility. Of these values, our owners' mindset is particularly important in an SGH context and is deeply embedded into our operating model through four core characteristics. First, we integrate an owner's mindset into our operating cadence focus on execution and growth over unnecessary process. Second, each business operates under a dedicated Board structure ensuring clear accountability for performance and [indiscernible] Third, decision making is pushed to the frontline wherever possible, creating a lean and empowered workforce. And fourth, our lean operating structure and focus on accountability make SGH inherently scalable.

Slide five. This slide demonstrates our capital allocation in action. Our diversified operating structure allows us to preferentially allocate capital toward our portfolio of businesses or into new opportunities depending on where we identify the strongest opportunity for risk adjusted returns. Our incremental capital allocation is focused on Australia. And guided by the systematic exposures of industrials, [indiscernible] Where we target high quality businesses that benefit from long term structural demand tailwinds. A highly cash generative industrial businesses allow us to take on and rapidly reduce leverage through operating cash flow. We can achieve that at an investment grade pricing given our consistently strong earnings profile Importantly, the cost of that leverage is well below our long run EPS growth rate.

It can be used to effectively amplify return on equity. We combined that financial leverage with operating leverage and disciplined execution to drive long term TSR outperformance. Slide six. SGH is focused on deploying incremental capital in Australia SGH the industrial and energy we have identified long duration growth opportunities This disciplined approach to capital allocation combined with our operating model has supported SJH to deliver consistently strong financial results. In Infrastructure and Construction, the outlook remains strong. With $1,800,000,000,000 investment expected over the next seven years. In mining production, iron ore volumes continue to grow and coal volumes remained consistent year on year. Both commodities are expected to remain strong decade and beyond, In energy, strong demand and tightening supply are expected in the domestic gas market from FY '26 onwards.

In LNG, demand growth remains strong with supply risk skewed to the downside. Slide seven. The earnings growth in Industrial Services led by Borrow and Energy at Beach the core drivers of growth in the half year 2025 result.

Revenue was up 2% and EBIT margin increase to 15.3%. EBIT of $843,000,000 was up 10% and NPAT of $5.00 $8,000,000 was up 7% Case strategic outcomes for the half included the completion of our acquisition in July after which leverage peaked at 2.3 times before being brought down to below 2.2 times by December. Have also lifted our interim dividend for the first half by 30% to $0.3 per share fully franked. Representing our thirtieth consecutive period of stable or growing dividend. Slide eight. Our focus on P and safety continues to deliver tangible results across our businesses. In safety, have seen significant progress in our lost time injury frequent The right improving by 9%. And in our total recordable injury frequency rate improving by twelve percent. In sustainability, the Barrama Chlorine Biofrost is now complete improving the facility's alternative fuel use capability to 45%. At Beach, the Moonbrook carbon capture and storage facility was commissioned over the half and is now operating at full capacity. West Track delivered revenue and earnings growth over the half against a low single digit part price reduction effective January. Total revenue of $3,200,000,000 was up 8% driven by a 13% growth in capital sales 1,200,000,000.0 and a 5% increase in services revenue to $2,000,000,000 The EBIT margin contracted slightly to 11.1% with component growth partially offsetting the impact of the parts price reduction.

EBIT of $352,000,000 up 5% reflecting strong underlying customer demand and operating discipline. WestRock delivered an improved cash result with operating cash flow of $258,000,000 up 146% and EBITDA cash conversion lifting to 67%. The cash result was supported by stronger earnings and a lower relative build in working capital. Slide 11. [indiscernible] with revenue growth of 5% and a CAGR of 11% over the decade. The headline growth delivered reflects the strength of the underlying demand of West Track supported by major rebuild activity, and the growing installed [indiscernible] [indiscernible] The outlook for both capital sales and services remains positive supported by production expectations for key commodity exposures. Strong fleet investment also continues with the aging installed base supporting demand for both R and M to extend asset life and capital sales to blend fleet age down. [indiscernible] Slide 13. Borrell delivered a strong earnings and margin result. Total revenue of $1,800,000,000 was down 2% supported by pricing traction, and resilient infrastructure activity offset by softer residential construction. EBIT margin of 14.3% was significantly up supported by operating discipline performance improvement initiatives, cost variableization and pricing traction. The margin expansion drove a 29% uplift to EBIT to $259,000,000 borrows return on capital employed to 15.3%.

The performance improvement initiatives delivered over the half [indiscernible] on operating efficiency and enhancing customer service, including a significant improvement [indiscernible] DIFOD delivery in full on time to 83%. SG and A expenses were 8% lower for the half and cost of sales are expected to improve further as volumes grow. Investment in equipment renewal has commenced and is expected to drive production and cost efficiencies. Progress was also made in increasing the performance of the network supported by initiatives to reduce costs, and increase P and L accountability across the business. Slide 14. Volumes were supported by robust demand for concrete offset by variable demand for other products including lower asphalt and quarry volumes. Pricing discipline held across all product lines with concrete pricing increasing by 3% inquiries by 4%, recycling by 7% helping to mitigate the revenue impact of softer volumes. The outlook for borrow remains positive supported by a robust infrastructure investment outlook That is [indiscernible] [indiscernible] previous forecast as well as an expected rise in residential activity needed to meet the national housing of [indiscernible] The result shows continued progress on borrowers' good to great performance journey. The focus remains on driving customer service outcomes, operational efficiency, cost prioritization and control price leadership and enhancing the network performance.

Slide 16. [indiscernible] Coats revenue of $546,000,000 was down 4% normalize the sale of Coats Indonesia in the prior period. The modest revenue decline reflects resilient customer activity in the East, West and North and lower activity in Victoria. [indiscernible] cost and pricing discipline drove growth in EBITDA and EBIT margins to 46.428.6% respectively. The result also was supported by operating leverage in R and M logistics and efficiencies and non operating operational cost out including a 7% reduction in personnel costs. The margin improvement helped to offset revenue decline leading to a 2% drop in EBIT when adjusted for the sale of Code Indonesia. Slide 17. Time utilization of 59.2% was down 1% and slightly below the high performance target of 60%. The utilization was impacted by softer demand in the South Region, which was partially offset by fleet repositioning leveraging our national footprint. Repairs and maintenance efficiency improved with R and M costs as a percentage of sales reducing to 17.3%. Supported by the continued rollout of the hub and spoke model. Market conditions mixed for codes with softer trading conditions in Victoria ongoing due to major project deferrals, partially offset by resilient activity the East, Coast has maintained pricing discipline across all regions against this increasingly competitive backdrop.

The outlook for Coats remains positive supported by utilities and transport spending 4% respectively in calendar year 2025. The cost out and efficiency gains delivered over the half have positioned codes well to capitalize on this expected market recovery. Slide 19. Beach delivered 15% growth in production to 10,200,000 boeys reflecting the connection of new offshore wells and production optimization initiatives. The production growth coupled with favorable pricing saw Beach deliver 5% higher sales revenue for the half. Beach also grew NPAT by 37% supported by the higher revenue as well as ongoing cost out from the organizational restructure. This included the delivery of a 30% reduction in headcount and a 20% reduction in field OpEx to 12.5 At SGH Genuity, our share of the crop development investment was $128,000,000 for the first half, The project is progressing on to schedule and first gas remains targeted for CY SJH Energy continues to collaborate with Amplitude Energy to assess bringing the long term gas resource in the Gipson Basin in the market. This supports our strategy of advancing domestic energy supply. Slide 21. Seven West Media's half year revenue of $727,000,000 was down [indiscernible] Leading to a 41% contraction in NPAT to $37,000,000 RPID25 costs were down 2% with full year costs expected to be $20,000,000 to $30,000,000 lower four.

These efficiency gains coupled with moderating market conditions are expected to support modest year on year earnings growth in the second half.

In other media, SGH realized $8,000,000 from CMC in half year twenty twenty five, bringing the last reported money on invested capital of Fund one to 2.5 times.

I'll now hand you over to Richard for more detail, run through the financial results. Thank you, Ron, and good morning.

SG and A has delivered another compelling financial result for the half, achieving revenue, margin and earnings growth in varying market conditions. Revenue of $5,500,000,000 was up 2% or 3% when adjusting for the sale of Coats Indonesia completed in '24. The revenue growth was driven by 8% expansion at West Track, partially offset by a slight contraction at Borrel and Coats. Expenses for the six months rose 2% mainly due to West Track, where cost of goods sold grew in line with revenue.

This was partially offset by cost efficiencies delivered at Boral and Coats.

The lower relative increase in expenses compared to revenue reflects SGH's characteristics disciplined cost management, and realizing operating leverage which when combined with higher equity accounted earnings drove significant margin expansion. This increasing operating leverage amplified revenue growth driving EBITDA up 8% to $1,100,000,000 and EBITDA up 10% to $843,000,000 When adjusting for the sale of Coats Indonesia, EBIT growth was 11% period on period. Net finance expense of $162,000,000 was up 14% largely referable to the increased net debt associated with completion of the Boral acquisition. The underlying tax expense of $173,000,000 was up 17% driven by higher taxable earnings for the period. Underlying NPAT rose 7% to $5.00 $8,000,000 while statutory NPAT rose 134% to $526,000,000 The largest statutory delta reflects substantially lower significant items Losses from our equity accounted investments relative to the prior comparative period. Moving to Slide 24. SGH's statutory result includes $45,000,000 of pre tax significant item losses, primarily driven by a $32,000,000 mark to mark impairment of our Seven West Media investment. Other notable pre tax significant items include SCH's $8,000,000 share of Seven West Media's significant item losses, our 4,000,000 share of significant item losses from Beach, and a $5,000,000 net income from discontinued operations reflecting the receipt of deferred consideration partially offset by additional liabilities recognized for previous divested oral U. S. Businesses.

SGH also preliminary recognized $60,000,000 in positive post tax significant items attributable to the tax benefit on ACA tax value reset on Borrow's entry into SGH's tax consolidated group. Combined, these significant items resulted in 18,000,000 net benefit to after tax statutory earnings for the six months. Moving to Slide 25. This slide presents an EBIT bridge detailing the underlying EBIT movement for each business as well as a reconciliation to statutory EBIT. West Track EBIT increased by 18,000,000 overcoming the EBIT headwinds from a parts price decrease highlighting the strong underlying customer demand for both new equipment and services. Oral's EBIT growth of $58,000,000 with marginally lower sales volume more than offset by pricing traction and performance initiatives, driving significant margin expansion point 3%. Coats EBIT declined by $8,000,000 or $4,000,000 when adjusting for the sale of Coats Indonesia. The decline reflects softer revenue due to project deferrals in Victoria, partially offset by margin growth from cost reductions and R and M benefits from the continued rollout of the hub and spoke model.

Energy's EBIT contribution increased by $20,000,000 driven by a 37% rise in Enpata Beach enabled by 15% production growth and a 20% reduction in operating cost per barrel. Media EBIT contribution declined by $5,000,000 reflecting a softer total TV advertising market partially offset by cost out initiatives. In aggregate, these movements delivered $79,000,000 increase in underlying EBIT to $843,000,000 or $797,000,000 statutory EBIT after accounting for the $46,000,000 of above line significant items. Slide 26. Underlying operating cash flows for the period increased by $106,000,000 to $821,000,000 largely driven by stronger cash flows from West Track. West Track's operating cash flow rose by $153,000,000 to $258,000,000 supported by earnings growth and lower machine inventory. This was partially offset by higher PEX inventory and lower advance payment. The higher cash flows from West Track were partially offset by lower cash from Boral and unfavorable working cap movements and coats due to modest earnings decline. EBITDA cash conversion at Westrack grew 39% on an [indiscernible] partially offset by lower conversion of Boral Encode. In aggregate, These businesses delivered 75% EBITDA cash conversion for SGH, ahead of the 70% conversion in the prior comparative period. Net interest paid increased by $35,000,000 to $103,000,000 reflecting higher interest rates on floating rate debt, and the increased debt used to fund the Borrow acquisition.

Net income tax paid rose by $87,000,000 to $152,000,000 primarily reflecting the higher taxable income and the utilization of Borrow's carry forward tax losses in the prior period.

Net investing cash outflows for the year increased by $130,000,000 to $274,000,000 reflecting higher CapEx for Crox coupled with lower proceeds from disposals.

Net financing cash outflows rose by million dollars to $7.00 $1,000,000 driven by higher repayment of debt increased dividend payment payments for both shares and transaction costs associated with the Borrower acquisition. Closing net debt increased by $248,000,000 to $4,600,000,000 primarily due to the completion of Borrell's transaction and foreign exchange impacts on our U. S. Dollar denominated debt. [indiscernible] Slide 27. SGH's net assets increased by $625,000,000 to $4,700,000,000 as of thirty one December. Largely comparable to the decrease in trade and other payables and an increase in the oil and gas assets partially offset by a decrease in inventory. The $5.00 $4,000,000 decrease in trade and other payables primarily relates to the closeout of the $335,000,000 for BORAL shares purchased. Required to achieve full ownership. The increase in oil and gas assets reflects $137,000,000 rise in the carrying value of Crocs. Comprising $128,000,000 in development expenditure and $9,000,000 in remediation. Provisions.

The $155,000,000 decrease in inventories was predominantly driven by working capital issues at West Track, enabled by the easing supply chain constraint. The combined impact of these items along with other lesser balance sheet movements resulted in net debt of $5,600,000,000 or $4,600,000,000 excluding leases representing a 6% increase over the June 24 debt levels. Slide 28.

Adjusting for the $197,000,000 of mark to market debt related derivatives SCH's adjusted net debt to EBITDA or leverage was 2.18x at thirty one December. This represents a 4% decline from the peak of 2.3 following the Borrell acquisition in July and is flat relative to thirty June. We expect to continue deleveraging in the second half through strong operating cash flows supporting financial flexibility and growth. SG and A fully repaid the $700,000,000 Borrell acquisition early in the half utilizing the proceeds of the six year $600,000,000 Asian term loan. SJH also took on $600,000,000 incremental rate hedging at 3.6% swap rate, increasing the fixed portion of our drawn debt from 49% to 65%.

We've also extended two SFA tranches early in the second half totaling $1,300,000,000 These initiatives diversify our funding base and the level of support from our new and existing lenders reflects our strong balance sheet, earnings profile and stronger credit metrics. At thirty one December, 65% of SGH's debt was fixed with an average drawn tenure of four point nine years, at an average rate of 4.8%. Post the refi, average duration has been pushed out to over five We also have no further material corporate bank I will now hand you back to Ryan. Thank you, Richard. 05/30.

SGH remains focused on deleveraging through strong operating cash flows in FY 2025. While driving disciplined execution and operating leverage. At Borrow, our focus is unlocking margin expansion and improving customer service in support of our ambition to deliver through the cycle mid teen EBIT margin.

At Coats, we continue to drive operational efficiencies targeting a return of time utilization back above 60% while maintaining R and M to sales below 18%. Focus remains execution of the capital sales and rebuild pipelines to support customer fleet productivity We'll also continue to allocate capital across our businesses where we see the strongest potential for risk adjusted return.

These priorities will be executed in line with our disciplined operating capital allocation models which have underpin earnings outperformance at TOPdesdale TSR for over a decade. Slide 31, The strong first half earnings result and positive outlook for our core sector exposures gives us confidence of achieving our full year earnings guidance of high single digit EBIT growth expected in FY 2025. WestRock's outlook remains strong supported by underlying growth in services activity, and robust capital sales pipeline. Volumes are expected to remain under pressure of borrow in FY 2025 We While cost discipline operating efficiencies and improved customer service support the outlook, Trading conditions remain challenging for the South Region for Coats, while infrastructure activity in other regions ongoing cost out and the fleet profile support the outlook. At Beach, a strong first half production supports the narrowed FY 2025 guidance of 18,500,000.0 to 20,500,000.0 boe. Per FY 2025. At SGH, we remain focused on deleveraging through operating cash flows, targeting and adjusted net debt to EBITDA ratio of two times. We look forward to capturing these opportunities and delivering for our customers and stakeholders in FY 2025 and beyond. Thank you for your interest and continued support. We're now open to questions.

Your first question comes from Shariya Viswan from Bank of America. Good morning, Ryan. Good morning, Richard.

Congrats on the results and Two questions please. I'll start with Ryan, just looking at BORGLE, right, you're talking about EBIT margins of 14.3% If we look at what you've sort of told us in the past, those targets of mid teen EBIT margins Is there a view internally to think that these margin targets should be set higher also what numbers are we looking at I had a quick follow-up, but maybe you want to go with that.

Yes, sure. I mean, if just step back in the moral journey originally when we acquired a plus stake and then became active. We set out deliver a low EBIT margin. Since then, we've seen the performance journey executed I think superbly. And that's kind of stepped beyond that. So we lifted that low teen, 10 to 12 even margin to somewhere closer to low teens, mid teens. And our view is that needs to be achieved through the cycle, not just at a peak moment. I just know we're not quite at mid teens yet. We'd say we're at low teens and performing well. We expect this to be a journey that will occur through FY 'twenty six and beyond.

What's been pleasing the experience of Borrell and the way the team with Vic's leadership have executed has been unlock of that margin has come quickly. There's still more potential for further performance improvement So I don't think we're necessarily done with that target, so to speak, and we've capped out as a potential improvement within borrow. The more we see that the team This is this is at every level within borrow perform. And deliver the results, we see that margin potential [indiscernible] but this will take time. So we're not expecting that to cap out. [indiscernible] as we move into 'twenty seven and beyond, we've just We still have an ambition to see that that even margin just edge further up. Thanks, Andre. Just to be clear, mid teens EBIT margin is SGH we're not we haven't pivoted from that focus. At this point. So why not pushing beyond that from an ambition we're calling out. [indiscernible] Thanks, Ryan. Richard, quick one for you. Just on bottle, right? If we look at seasonality the bottle is more first half weighted. If you think about last year, your EBIT was 54, 46 I mean, look, I'm not trying to get to an exact number, but is that a good ballpark to think about or there's something that's happened this half that we should be mindful of?

I think the seasonality usually displayed by Virol reflects elements like Easter and Zach Day falling in the second half, slightly different weather patterns. I think that is at this stage, that's probably the best reflection of what we would expect in terms of FY 2025.

Thanks, Richard. Ryan, last one for you. Look, I need to ask SGH. Just in the guidance, right, I mean, look, first half is very strong. Of course, you've not change your guidance. Is it fair to say that COVID is holding you back?

No, I'd say there's a few aspects visibility is a question mark for us in second half. There's a past price dynamic playing a second half West Track as well, which does take some of the upper end of that opportunity off to be quite frank. And that's a similar price dynamic in the first half. We don't have the the revolve, but we do have the dollar margin impact in [indiscernible] there are probably some of the factors playing into it. We were focused on that guidance. But there's a few aspects that are going to take that [indiscernible] [indiscernible] again, from where we sit today, that's what we're aiming for. But as we go forward, and get further clarity through the year, we're hopeful we can continue to deliver consistently. So It's just based on what we see today, prudent to hold the guidance where it is. Great. Thanks Ryan. Thanks Richard.

Thank you. Your next question comes from Neeraj Shah from Goldman Sachs. Please go ahead.

Good morning, guys. Hope you can hear me. Just a follow-up question on the borrow margin. It seems to be a pretty healthy sort of balance between gross margin improvement and SG and A efficiencies. Just on the SG and A piece, how much of those savings do you view as sort of cyclical versus sustainable through the cycle?

Yes, that's good question. I mean, if we stand back and look at we think we are in the cycle, I mean, certain attributes across a positive from an activity context, But the overall volume is not at a high point in the cycle. We look at there's still a large [indiscernible] the borrow opportunities that sits in residential were kind of at a low end of that overall activity context and we know that needs to step up, that is opportunity for us. So from a cycle context, we're not at a high point. So I think we're you're better to think through the current cycle is kind of more mid cycle than anything else. So the [indiscernible] efficiencies today, we do see them being able to be locked in, I think The core element of the Good to Great strategy is actually embedding those changes. So they're not just one off that they're actually locked into the way the business operates. They become quite just core to an efficient [indiscernible] that we do expect to sustain and we do see more opportunities as we can kind of improve network performance that ultimately is going to further lock in improvement within the business.

Great. Thanks. And just a follow-up on Borrel. Could you just perhaps remind us of where things are at with logos? Or and more generally, I guess progress against the broader property strategy within BORO? [indiscernible] Deer Park is kind of in the background. Moving through its stages. So a the moment, we've got various stakeholders we're engaging with, including [indiscernible] The nature of that partnership with Logos is about taking that forward. We have been relying their expertise, if you like, on that development context. So it's modeling up what's going to be the highest and best use for the site from an industrial perspective. And it's enabled us in a borrow context to focus on core business. But it's something that we're we don't envisage seeing that play through in this side of the five year outlook is probably in the latter side of the five year outlook before you see any real progress there. But it is moving on in the background. But it's not it's not an near term expectation that we're going to see that physically commence and then move into having rental income.

Understood. Thank you.

Thank you. Your next question comes from Peter Stein from Macquarie. Good morning, Ryan and Richard. Congratulations to the team on a good result. Just if I may on West Track, Ryan, you've obviously cited the margin effects of that parts pricing decision by Cat in the second half. But in the context of the strength in the U. S. Dollar, what are your expectations around pricing going forward? And what are the likely impacts on West Track Part price is traditionally set [indiscernible] [indiscernible] the decision from a January perspective is pretty similar reduction to January. So that's where we're working within half two and hence comment around the guidance, but it's difficult to say what that will be for FY 2026 We don't have any visibility on that. The currency has moved in such a way that the moment that that looks more positive than not. We don't quite know. And that's a process we'll get better visibility to be frank in that kind of end May June period. But at the moment, we're focused on that dynamic in half two The even through that, we've seen a step up in service revenue activity remains strong. And if you looked at that past product dynamic through it's pretty simply pretty close to that ten year CAGR from support growth.

So we still see that activity demand remaining strong. We haven't started the big fleet rebuild program. SGH we've had delivery of new replacement trucks. We haven't seen some of the big fleet truck rebuild processes occur. So that will play more into 'twenty six and beyond as well.

Thanks, Shroyen. And then perhaps just a follow-up on that. The fairly significant unwinding inventories at a group level of $156,000,000 Presumably, the vast majority of that came from West Track. You sort of pointed to less machines and packs in the inventory, but could you give us a bit of a forward look expectation there? Supply chain normalization is obviously an important structural development there, but So what do you think is going to likely be the cash dynamics in West Track?

We'd like to kind of return to our EBITDA cash conversion. If we look at the period we actually build inventory within West Track period on period. I mean, but it was a much lower build, but and as you saw the release from the prior period come through. So still a pretty healthy order book. I think to be honest, the outlook we're trying to get a feel for when we look at the the big rebuild program that's probably going to be a heavier working cap dynamic for us, but not material, not that you'd [indiscernible] [indiscernible] but we still see that playing through over the next couple of years.

Overall, [indiscernible] Availability is improving. That's enabling us to get back to more working capital to sales level and we would over time back to that high 20% level versus where it's at a kind of 30% of sales. So that's kind of long and short, we would that expect that to start to normalize back to A traditional Yes, kind of inventory to sales level. Perfect.

Thanks Ryan. I'll leave it there.

Your next question comes from Ramon Lazard Jefferies. Please go ahead.

Okay, guys. Can you hear me okay?

Yes. Great. Yes, just a couple more on bolus, if if I may. Just the 200 basis point year on the improvement in gross margin, I think mix sort of is still a drag to that margin just given resi's weak So just wondering what's driven that step up in gross margin improvement? Is it all just for the combined price or something else?

I think there's a couple of factors. I mean, firstly, the pricing had a big component of that. So that price realization across the product range. And if you think about looking at it from a product context, we have achieved pricing in concrete through the period. The different I mean, even though we haven't got a strong resi dynamic, we've been able to get better pricing through that infra. [indiscernible] I think the cost management kind of at that and efficiency is driven at all levels It isn't just about a focus on SG and A. This is a about the direct costs and what we can do to drive efficiency there. I think that they're all the factors. So a little bit, I mean, that margin improvement has been pricing, but a lot has been at hold process to optimize and drive efficiency through the network of borrow.

Okay, great. And just on the SG and A piece, is it Should we just assume second half sort of SG and A like the run rate similar to the first half around 100 and and $90,000,000 or so SG and A costs you saw in the first half, we just annualize that into the second half? Or is there something else that we need to take into account heading into the second half?

I mean, there's nothing material that stands out. To be honest, it's probably it is [indiscernible] broadly consistent second half and nothing that stands out from a first half perspective on the SG and A side. I mean, there'll be further kind of marginal improvements that we'll look to make on Not I mean, I think looking at that half on B, half to pretty similar is right.

Okay, great. And just to confirm that SG and A to sales is now sort of tracking around just over 10% of sales, which is higher than where it's been And you think that's a sort of sustainable level even when volumes come back The SG and A, the salvage, I think come down quite a bit of the period in context, but As far as the operating leverage in the business, yes, [indiscernible] There's obviously some increase in SG and A, but not a corresponding amount relative to the growth. So we do see further operating leverage as volumes grow absolutely coming through. And hence, we talk about the EBIT margin dynamic, our focal point on it through the cycle Actually, I mean, if you see a big step up in resi come through, volumes step up accordingly. Obviously, there'll be a natural kind of operator actually come through an EBIT margin translation as well. But our focus is on how do we get this to be sustained through the cycle, not just having that EBIT margin and then a drop away. So the short answer is yes, as volumes step up, there will be more operating leverage coming through.

Great. Thanks, Ryan. I'll leave it there.

Thank you. Your next question comes from Hi, Ryan. Just two questions. First thing on West Track with the services business. With the growth slowing to 5%, presumably, that was impacted by the swing in parts pricing. But given a sort of a feel for what the underlying growth would have been if you sort of SGH that out? Yes, look, in short, that's right. If you think about services, the lion's share of that is is part. So you're probably best to look to that low single digit impact and that will move that up close to that CAGR. It'd be from a normalization aspect, it'd be probably revenue would have been closer to 8.5% odd in that context.

Cool. And with Coats, can you talk about the exposure to Victoria? I mean, we broke down here in Mexico and when the big build finishes, next year or so, there's going to be quite a big delay higher. So can you talk about how that's the shape of that curve?

And then how easy it will be to relocate gear to other states?

Yes. Look, frankly, I think we're kind of in that that period in Victoria at the moment. For one of the better description, we're talking about the broader economy. We see things relatively stable across kind of New South Wales, Queensland, WA and recession in Victoria if we looked at from an infrastructure and construction activity. And Emperor, we still feel pretty comfortable and confident in the outlook. I think the broader issue is I think that's the only thing happening in Victoria is probably the way we characterize it. There's a lot of other activities being suppressed So we haven't seen the balance of that activity, but we still see pipeline projects continuing. They're [indiscernible] projects that are commencing. SGH it's a fact that what we're managing through From a coach perspective, yes, the relocation of fleet, the rationalization of presence and cost that's all underway at the moment. It's [indiscernible] The more dramatic impact in the half has been the elements in Victoria and coats itself that.

Yes. And so with that reallocation, is that going to save on CapEx in the next year or two?

Yes. We definitely see FY 2025 CapEx being kind of under where we would have expected. So that's going to be slightly lower. We'll also certainly look at where we'll end up from a regional cost of perspective. So that will probably still hover around that 1.8 to $1,900,000,000 range. But clearly, we'll be moving gear to where there's demand and if we don't see that that demand, that's a question what we do with that fleet. But overall, view we've had through Coats has been trying to had a long term perspective on fleet. So we haven't fleeted for that peak. So we've got a lot more flexibility in where we move around the country and that's been happening through half. So I'd say it's something that's going to naturally have a slightly lower CapEx through FY 2025.

But not materially, but it will be lower than we where we guided to originally.

Thank you. Your next question comes from Brook Campbell Crawford from Barrenjoey.

Good morning. Thanks for taking my questions. Just a few quick ones. Firstly on borrow margins, obviously very topical, but in the presentation, there was a explicit comment that you're aiming to lock in the borrow margin improvements. Does this suggest you think that 14% EBIT margin achieved in the first half is sustainable into the second half?

Look, it'll be there or thereabouts to I don't we're not projecting it to be above that. We're probably arguably be slightly below that for half two, but fundamentally on a full year basis, it will be in that upper end of the low teen [indiscernible] range, if that makes sense. And then I think the key point there is saying that changes are not just one off and not short term. They're in trying to end the way Borrell operates, it will mean that we want to continue to build on that as we go forward into 2026 and beyond.

Understood. Just a couple of clarifying questions on the West Track parts price dynamic. Can you just confirm or quantify what the EBIT headwind was in the December half just gone relating to that price fall? And then for the one January change, I would have thought a lower Aussie would have ordinarily led to a higher parts price in dollar terms here locally. So if you need maybe just step through what we're missing there and what's perhaps not what I would have thought maybe I misunderstood the way that dynamic works? Firstly, on that latter point, I'll let Ricky answer first one. But the that point on the the way that pricing structure works, it's not it's a period of time where [indiscernible] is assessed and then period where it's kind of announced and implemented. So if you think about that, it's for half, it's kind of like six weeks out from that period. So it was [indiscernible] And unfortunately, there was a much stronger currency period there. It's It's not as [indiscernible] that context that we get the same visibility as to what the drivers are, But at that point in time, it was a much higher off.

Where it is today, you're right, it should have been the opposite. But relation to your first question, Richard? So the revaluation impact was about $36,000,000 in SGH absolute sense. There was obviously then a second order impact in just in a revenue So what we did see is an increase in, again, in lines shipped So the volumetric increase and against that backdrop, we actually saw the average cost per line also increase. Highlighting that the work that's been done is certainly moving into the larger component type rebuild work Got it. Thanks. And just the last one.

With respect to Crooks, do you mind just providing a comment on I guess, expected timing for your earnings share of earnings there and I guess at spot pricing and your assumptions around cost, etcetera. What What would your share of EBIT be once that comes online?

Yes, that's probably I think timing wise for us, is CY27. So we're probably we're [indiscernible] 'twenty seven. [indiscernible] In a early FY 2028 it's difficult to say what that's going to be, but if you think through the timing, first stage will be getting that up and into production. So first year shouldn't be that substantial then well a better feel for what the outer years are going to from production perspective. But [indiscernible] put that in the model, it's going to be in that timeframe. [indiscernible] I think probably think of it more in terms of cash flow rather than earnings contribution, Brook, because there will be amortization of the capital cost But in terms of that, once in full production, we would expect Tom, upwards of $250,000,000 of cash flow.

That's great. Thank you.

Thank you. Your next question comes from Joseph House from Bell Potter Securities. Please go ahead.

Good morning, Ryan and Richard. Thanks for taking my questions. I've got three. Firstly, looking at West it appears your inventory remains elevated and that's generally been a positive indicator for growth ahead. How is in transit, inventory holding up against historical trends and at thirty June twenty twenty four? And how should we think about the timeline of machine deliveries ahead? Does the current order book see deliveries into early FY twenty twenty six? [indiscernible] So in transit was actually up slightly, and that just reflects again we're in the middle of a very strong delivery cycle particularly from mining machines into WA. In terms of that certainly gives us confidence around the outlook for the remainder of the year. And the team is currently working to then lock in the order book for next year. [indiscernible] called out in your AGM that you expected a recovery in residential market activity from late FY twenty twenty five. Are you still keeping to that outlook? And if so, could you perhaps talk to what gives you confidence in that outlook? And maybe some discussions you're having broadly with customers on incoming project deliveries?

I think most of the late twenty five is in calendar year 2025. We haven't expected to come through in FY twenty twenty five. So [indiscernible] [indiscernible] To be honest, we haven't seen any indication of that changing. I think it's pretty well publicized sector as far as that activity and ABS published the data, which to be honest, we use as our insight tool as well. But We haven't seen any standard shift there. What gives us some confidence is just know the demand is there, we know there's a gap in supply. There's a lot of political will to solve it.

And there's yet to be a catalyst. And our view, like a rate cuts probably confidence catalyst that will help. So they're the factors, but we are not expecting that to change in FY 2025. [indiscernible] for the kind of towards the end of calendar year 2025, we'll see a shift. But and then there's a time before it translates to a benefit like a borrow and potentially coats, but that's that timing is not going to play through this financial year. Certainly not in our expectation.

Yes, understood. And just on borrow, how should we think about the uplift in margins from the heavy mobile equipment renewal program that's underway over the short to medium term? Look, frankly on that point, probably minor. If you recall, I think it was more than twelve months ago now. We called out a step up in what we term catch up capital, which was quarry investment, a HME and then the agitruck fleet, three years we need to deploy capital. So this is coming through that HME There'll be some savings in R and M, some reduction in rental costs and op costs but it's going to be relatively small. We see that up just overall kind of efficiencies we're having that fleet standardized better. Better overall performance of fleet But it won't specifically be the catalyst to drive a margin improvement or just be part of the mix that's going to drive further efficiencies of borrow.

Thank you. Your next question comes from Nathan Riley from UBS. Please go ahead. Good morning, Ryan and Richard.

Quick question just in relation to your expectation for the Coats business in terms of equipment utilization for the second half, please?

We are focused on and have our ambition to get that back to 60%. From a TEU perspective. It's an important threshold. We're We were hopeful we'll be close to that through through the first half, but activity and relocation of gear from South to other parts of the network have been the key focus for us. That's something we're committed to deliver on. And from our perspective, we want to see that delivered and executed half two, so that that's something we'd like to see kind of 60 plus percent TU.

And it looks like you've been pretty consistent on price, but in terms of the outlook and demand environment in Victoria, can you talk to the competitive outlook for pricing?

I mean, in our view, that pricing discipline is important. And retaining a focus on how we we drive a customer value through The overall offer versus just looking at price. So we work closely with customers in in how we kind of win projects and deals based on on the overall fleet offering. The quality of the service broader attributes than purely price. But what we've known is if we pull a price leader, the industry by nature will follow. So it's not necessarily going to drive a better competitive outcome. From our perspective. So it's something that we're [indiscernible] We want to see a fair price for the gear that we have and win through how we can drive service and value proposition of of the overall offering outside of just price labor. We still see a lot of activity across other parts of the region. So for us, the activity in New South Wales ran strong We're seeing good activity in Queensland and activity in WA. It's really just this dynamic of a shift in in overall activity in Victoria that we're navigating through in our view. Elsewhere, it's been been reasonably positive for the half Thank you.

And final question just in relation to borrow.

The good to great sort of progression and journey continues. But in terms of your thinking M and A within that business. Can we get a quick update on where you think the business is positioned from a bandwidth point of view, managing the efficiency process as well as I guess a potential growth process as well? I mean, I think the management team has got an incredible breadth to take on multiple aspects of that. So I wouldn't say the strategy. What we've been pleased with is how the Good to Great journey has been locked into an operating cadence. It's a very strong rigor. The monthly business review mechanism that's there really pushes that ownership and results. Into the business. So the core operating rhythm is there and driving the results. So we feel very confident that these changes being enshrined into how Borrell operates, which is something which is very aligned with how we think and that's been key as we think about that core operating model, and for the opportunities outside that. So we've still been able to progress growing other areas like recycling, looking how we develop the property portfolio and looking at other businesses to bolt in I think the key for us is making sure we remain disciplined from a pricing perspective, We've got a great network.

There's parts of it that we want to strengthen in areas. But again, back to our thought process and capital allocation, it needs to to drive an acceptable return and we are in a fortunate position. We don't need to [indiscernible] to bolster that network. An extremely strong network across borrow and we've got opportunities to drive that. But I think small quarries we've acquired and other assets [indiscernible] we'll continue to look to acquire the the borrow network. But I think [indiscernible] to do that from a capability context, absolutely. They've got capital support from SGH, absolutely. So it's just going to be disciplined around picking the opportunities.

Thank you. Are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect. [indiscernible]