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Cardno posts FY18 results as strategic plan progresses

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The Australian-headquartered infrastructure and environmental services company Cardno has released results for FY18 outlining increased profit on lower revenues. This it describes as a ‘phase of stability’ as it enters the execution stage of its turnaround plan.

For the twelve months ending 30 June, gross revenue fell 5.5% to A$1.12bn (US$0.8bn) whilst net fee revenue slipped 3.1% to A$763.5m (US$563m). However, EBITDA from continuing operations jumped sharply by 28% to A$56.2m (US$41m), giving a margin improvement at to 7.4% from 5.6% in FY17.

Net debt stood at A$19.9m (US$15m), up slightly on the FY17 position, but significantly down from A$49.6m a year earlier. Backlog was up by 9.7% to A$1.4bn (US$1.0bn).

'Phase of stability'

Despite the top line declines, chairman Michael Alscher was upbeat stating the firm is "finally coming out of the restructure phase" and that it is "operationally and financially in the strongest position it has been in the past three years", with a "solid basis" for both revenue and EBITDA growth in the medium term.

In a letter to shareholders, he outlined: "I am pleased to report that your company is beginning to benefit financially from the multi-year restructure of the business that began in FY16. [...] Having completed the company’s restructure, our focus shifts firmly to execution of initiatives in place and growth. We are now entering a phase of stability with incremental growth driven by organic initiatives, business optimisation and disciplined, conservatively funded ‘on strategy’ accretive acquisitions. This position is supported by our balance sheet which remains strong."

Alscher - also managing partner at Crescent Capital Partners which took a 41% stake in Cardno back in 2015, triggering the wholescale renewal of the struggling firm’s then board (EA 12-Nov-15) – suggested in an investor update that the it is now moving into a phase of stability, which he described as "simple and boring", adding that there is nothing planned that will represent a "material step change" for the business going forwards.

At an operating level, the firm now reports under five segments (following the breakout of Construction Sciences as a separate segment) managed separately by location and the services provided, as follows: Americas Engineering & Environmental (34% of gross FY18 revenues); Asia Pacific Engineering & Environmental (24%); Portfolio Companies (PPI and LatAm) (4%); International Development (28%) and Construction Sciences (10%).

Stages of recovery

The latest results show Cardno’s sectoral divisions at varying stages of recovery following the programme to rebuild the firm over the past two years in the wake of the oil & gas downturn, turbulence across its Americas operation and historic management inefficiencies across the group:

  • Asia Pacific Engineering division was impacted by continued restructuring in the Australian business and alignment initiatives, the wind down of some major projects, and a "project clean up".
  • In contrast, the Americas Engineering and Environmental division is beginning to see a "rebound in performance" having been the subject of considerable structuring initiatives in the past two years.
  • Construction Sciences and International Development both performed strongly
  • The PPI oil & gas business, based Texas, US, also benefited from improving conditions, following a material restructure in terms of services offered away from high cost oil countries (eg Nigeria) towards quality assurance, with a return to profitability in the final quarter.
  • Within the LatAm business (Latin America), Cardno continues the wind down of the Ecuadorian Caminosca business (with the expectation of full withdrawal over the next 18 months). In contrast, the Entrix environmental science business in Peru saw strengthening margins and results.

The annual results also provide a split by geography, indicating the importance of its two main regions – Australia & New Zealand and Americas - which represent 46% and 42% of total group revenues respectively. The remainder is largely generated from Asia (6%), UK (2%), Latin America (1%), and the remainder from Africa and Other Countries.

Bolt-ons

Having hinted at the resumption of its M&A aspirations last year, the firm made three bolt-on acquisitions during the past year, although none of which are considered material to the group:

  • Network Geotechnic: 80-strong New South Wales business, strengthening Cardno’s Construction Sciences segment
  • Sure Search: 52-strong Australian utility location and management business, strengthening Cardno’s expertise in utility management, survey, infrastructure design, geospatial services and project management offering
  • Trilab: 40-strong supplier of specialised soil mechanics testing and rock mechanics testing business, strengthen Cardno’s materials testing and geotechnical engineering offering.

Alscher confirmed that Cardno continues to explore "on-strategy" acquisitions to gain access to key markets, skill sets or service lines, through a "disciplined M&A process" with an emphasis on due diligence and integration.

Looking ahead, FY19 will represent the third year of a "multi-year business improvement plan" whereby the focus remains unchanged, namely: cost control; expanding EBITDA margins across all division; organic growth across all divisions; investment in people and improved client collaboration across offices; strategic accretive bolt on acquisitions.

Digital/IT priority

However, Alscher did also stress that investment in business development in FY18 may depress growth in the short term. Also highlighted as a priority over the coming period is "considerable IT/ digital investment" to improve engagement not only with clients but also with staff internally and increase productivity. It was an initiative that is still in its early days he said, but the firm expects to see some "major milestones" before year-end and into 2019.

At fiscal FY18 year-end, publicly-listed Cardno employed some 5,830 staff based in 168 offices worldwide, from 6,000 and 130 respectively from the end of FY17.

The firm has also recently welcomed its new CEO, Ian Ball, who will be spending the first weeks of his tenure familiarising himself with all elements of the Cardno business before officially taking over from Alscher in October (EA 6-Aug-18).

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