Announcement PDF ANNUAL REPORT FOR THE FINANCIAL YEAR ENDED 30 JUNE 2023 VERB REC ANN UA L REP O RT 2 0 2 3 2 V E R B R E C AN N U AL R E P O R T 2023 FY2023 Contents 5 Safety/FY2023 Highlights 32 Directors’ Report 6 About Verbrec 54 Auditor’s Independence Declaration 7 Verbrec at a Glance 55 Financial Statements 8 Our Core Services 56 9 Our Markets Consolidated Statement of Profit or Loss and Other Comprehensive income 10 Our Purpose and Ambition 57 Consolidated Statement of Financial Position 11 Our Values 58 12 Chairman’s Letter to Shareholders Consolidated Statement of Changes in Equity 14 Board of Directors 59 Consolidated Statement of Cash Flows 16 CEO’s Letter to Shareholders 60 Notes to the Financial Statements 18 Our Executive Team 108 Directors’ Declaration 20 How We Create Value 109 Independent Auditor’s Report 22 Market Outlook: Energy 113 ASX Information 25 Market Outlook: Mining & Resources 115 Corporate Directory 28 Market Outlook: Infrastructure 3 VERB REC ANN UA L REP O RT 2 0 2 3 Engineering transformative solutions through full project and asset lifecycle. 4 V E R B R E C AN N U AL R E P O R T 2023 Safety Zero Harm, Always LTIFR MTIFR TRIFR FY16 1.14 1.14 2.28 FY17 0 2.39 3.59 FY18 0 1.45 4.35 FY19 0 0 0 FY20 0 0 0 FY21 0 0 0 FY22 0 4.35 8.70 FY23 0 1.20 6.02 466 SAFETY LEADERSHIP CONVERSATIONS 77 HAZARD REPORTS SUBMITTED 7 YEARS SINCE LAST LOST TIME INJURY FY23 Highlights $M 2020 2021 2022 2023 Revenue 117.0 97.4 121.4 118.2 Gross Profit 36.3 26.8 35.4 30.4 Gross Profit Margin 31.0% 27.5% 29.2% 25.7% EBITDAI 7.3 0.3 3.0 (0.7) EBITDAI Margin 6.2% 0.3% 2.5% (0.6%) NPAT 1.8 (4.5) (3.1) (9.5) Cash flow from operations 10.6 (1.6) 3.1 (3.9) Impact of the foregone margins on poor performing projects and one-offs is as follows; Gross Profit 36.3 34.0 42.1 33.9 Gross Profit Margin 31.0% 34.9% 34.7% 28.7% EBITDAI 11.4 7.7 10.1 4.3 EBITDAI Margin 9.7% 7.9% 8.3% 3.7% NEW WESTPAC FINANCING FACILITIES ENTERED INTO TO FUND FUTURE GROWTH WORK IN HAND STILL STRONG 5 VERB REC ANN UA L REP O RT 2 0 2 3 About Verbrec Verbrec is a leading engineering, asset management, infrastructure, and training services provider, operating across the entire asset life cycle. Under the Verbrec name, we have brought together a number of established companies, including LogiCamms and OSD, which individually have a strong track record of delivering specilised services to the energy, mining and infrastructure industries since 1988. Our experienced team is recognised for it’s responsiveness and agility. We operate across multiple regions, including Australia, New Zealand, PNG, and the Pacific Islands, executing projects for organisations of all sizes. We are driven by a common purpose that inspires our own people which, through strong client relationships built on trust, we transform assets and people for a more sustainable and smarter future. With capabilities that range from concept design to end-of-life management, Verbrec is uniquely positioned to support and understand our client’s priorities in their energy transition goals. Our strengths lie in how we bring together our technical knowledge, engineering, niche construction, operational readiness, asset management and training capabilities to provide our clients with integrated solutions across the entire lifecycle. From initial concepts and planning – designing and delivering – operating and maintaining – to closing and transforming their assets. At the heart of our business lies an endless drive to offer our clients a better way of working. Founded on a culture of high performance and safety, we continue to foster effective partnerships and alliances through a deep respect for our people. Verbrec represents the industry’s evolution and continued growth by leveraging emerging technologies for a more sustainable future. 6 1 98 8 20 19 2020 2021 2022 LogiCamms established LogiCamms acquired by OSD to form a mid-tier service provider Verbrec is formed StacksOn commercialised Verbrec brands are introduced Divisions within LogiCamms All divisions become Verbrec companies V E R B R E C AN N U AL R E P O R T 2023 Verbrec At A Glance Driving continued growth by leveraging emerging technologies and the adaptability to remain at the forefront of an ever-changing industry. The Verbrec brand represents our evolution. 500+ 3 TEAM MEMBERS CORE MARKETS ENERGY MINING INFRASTRUCTURE Darwin 14 Verbrec Engineering Services Verbrec Asset Management LOCATIONS Mackay Verbrec Infrastructure Services Verbrec Industry Training Dalby Brisbane Br isbane Perth New Plymouth Adelaide 30+ AREAS OF EXPERTISE 1 PURPOSE Through strong relationships built on trust, we transform assets and people. “Transforming assets for a sustainable and smarter future” 7 VERB REC ANN UA L REP O RT 2 0 2 3 Our Core Services As the industry goes digital and moves closer to its net zero targets, we have built an ecosystem offering solutions around our four core pillars. Our services are engineered to enable our clients to not only be prepared for the long-term but also meet their near-term needs: VERBREC ENGINEERING SERVICES Verbrec Engineering Services provide innovative engineering and project delivery solutions to clients – through our technical specialties, including Automation & Control, Power, Process Plant and Pipelines. VERBREC ASSET MANAGEMENT SERVICES Verbrec Asset Management Services specialises in working with owners and operators across Australia, New Zealand and PNG to provide asset management solutions that increase efficiencies, reduce cost and improve productivity, unlocking higher value from client’s assets. VERBREC INFRASTRUCTURE SERVICES Verbrec Infrastructure Services for Project delivery from inception through procurement and/or construction, commissioning, operations and maintenance. VERBREC INDUSTRY TRAINING Verbrec Industry Training through Competency Training (CT) and Site Skills Training (SST) delivers training and competency assurance. As one of Australia’s leading providers, we run weekly high-risk work licence courses and qualifications designed to help you or your employees advance in mining, resources, oil, gas, construction and engineering industries. 8 V E R B R E C AN N U AL R E P O R T 2023 Our Markets The markets in which we operate are immersed in a transitional phase in the pursuit of a net zero future where the balance between carbon footprint and energy security must be carefully managed. ENERGY The oil and gas industry has begun major transformation towards sustainability. Verbrec’s deep experience in hydrocarbon-derived energy combined with our leading-edge experience in renewables and decarbonisation means that Verbrec is uniquely positioned to service the transition to net zero. We are renowned for delivering projects related to pipeline transportation of oil and gas, tanks and terminals, field processing, refineries, compressor and pump stations, LNG receiving terminals, power station inlet facilities, electrical and control, and hazardous areas. We embrace the transition to environmentally sustainable hydrogen and support our clients as they develop these projects. Employing only the highest standards of design safety principles, our multidisciplinary team supports clients by delivering environmentally sustainable and innovative brownfield or greenfield projects, with the capabilities to go beyond design work to provide full asset management, maintenance and reliability, and field operation services. MINING & RESOURCES The challenges encountered by the mining sector in its pursuit of sustainable practices are multifaceted. The mining industry’s transformation towards environmental responsibility presents challenges that demand innovative solutions. Verbrec has an exemplary track record of productivity improvement and innovation in the mining industry. From the pit to the port, we intimately understand the key commercial drivers in the value chain. This means our talented team and innovative solutions such as StacksOn™ integrate seamlessly with mining companies, regardless of size, to deliver safe, sustainable, cost-effective solutions that minimise risk and maximise throughput. We are recognised for our project delivery services, including the supply of natural gas to sites, hydro transport, electrical and controls, digital industries, automation and information technologies, off-plot facilities, asset management, maintenance and reliability, operations, and much more. We understand the fundamental commercial drivers for mining clients. This means we can work collaboratively, with both major mining houses and emerging companies, to deliver intelligent, safe, cost-effective solutions that minimise risk and maximise environmental sustainability. INFRASTRUCTURE Our clients face a number of intricate challenges within Australia’s pipeline industry amidst its transition towards hydrogen as a possible future fuel source. Our long-proven capabilities in pipelines extend to adapting pipelines for hydrogen transportation, addressing compatibility challenges, implementing safety measures, and ensuring reliable and efficient distribution. As Australia’s pipeline industry navigates the intricate terrain of hydrogen transition, Verbrec is positioned to be a transformative force. By addressing challenges related to green hydrogen production, pipeline adaptation, technological integration and regulatory compliance, we contribute to shaping a sustainable and prosperous hydrogen-powered future. Verbrec enjoys a depth of experience in infrastructure development and maintenance that can only be gained as a licensed operator. From design to project execution, commissioning and best practice asset management strategies, we know how to unlock the true potential of an asset. Beyond pipelines,Verbrec is also playing a key role in Australia’s water security and desalination efforts for Australia’s critical water infrastructure. We support in the balance of plant design and implementation of sustainable desalination technologies that reduce energy consumption, minimize environmental impact, and ensure long-term water resource viability. We are experienced in every aspect of the full lifecycle of water infrastructure, including both greenfield and brownfield projects, from concept through to long-term maintenance and operations. This extends from small water bore systems and gathering systems, to highpressure class 1500 water lift systems, to the replacement of large inefficient channel drains with thousands of kilometres of pipelines, with all of the associated pumping facilities and controls and automation. 9 VERB REC ANN UA L REP O RT 2 0 2 3 Our Purpose and Ambition The industries where we operate are evolving in line with macro trends. Our client’s operations are evolving to match their sustainability commitments. This positions Verbrec to deliver on its purpose – Transforming our client’s assets and people for a more sustainable and smarter future to support our clients with the solutions they need. OUR PURPOSE OUR AMBITION Through strong relationships built on trust, we transform assets and people. Our value proposition is hard to beat. This year, we announced our ambition to become a leading engineering brand of choice in providing sustainable and innovative solutions across the entire asset lifecycle towards the energy transition. “Transforming assets for a sustainable and smarter future”. Our values underpin both our purpose and ambition. 10 V E R B R E C AN N U AL R E P O R T 2023 Our Values These values are the core of our culture. We use them to structure our objectives, measure our performance, and hold ourselves accountable to our clients. “Everything we do is guided by the Verbrec Way”. TEAM MEMBERS We value our greatest asset. It is our people who deliver for our clients and who go the extra mile to meet their needs. We care for the needs of each other, as well as those of our clients and the communities in which we work. SAFETY Zero harm, always. Safety is a priority in everything we do to ensure zero harm to our team members, our clients and partners. Our safety culture is leadership-driven and backed up by comprehensive, robust, practical and ISO-certified systems and procedures. INTEGRITY We are transparent. We do what is right. Our integrity guides all our decisions and the way we interact with each other, our clients, suppliers and community. We pride ourselves on doing what we say we will do. INNOVATION Adding value by being a step ahead. Our integrity guides all our decisions and the way we interact with each other, our clients, suppliers and community. We pride ourselves on doing what we say we will do. DELIVERY Quality. On time. On budget. Providing outstanding service delivery is our mission. We hold ourselves accountable for delivering what we promised, when we promised it, and at the price we promised. 11 VERB REC ANN UA L REP O RT 2 0 2 3 Chairman’s Letter to Shareholders Dear Shareholders, FY2023 has proven to be particularly challenging for Verbrec. Despite that, we are seeing some more encouraging signs and I’m pleased to report that Verbrec is now heading in the right direction. The onerous legacy projects are all complete or have been terminated. The last, the Queensland Urban Utilities (QUU) SCADA Upgrade Project, was terminated, as previously advised, on 24 January 2023. While that represents a net positive for the Group, we are now managing our way through the negative working capital impacts that these projects had. During FY2023 the group’s results were impacted by $3.5m in foregone margins on the poor performing legacy projects and a further $2.6m from impaired work in progress, neither of which have been recovered to date. It goes without saying that the financial results for FY2023, as frustrating as they are for management, are disappointing and unacceptable from now on. Although the legacy projects are behind us, we have continued to pursue significant claims under the terminated contacts. In one case in point, Verbrec and Service Stream Utilities Pty Ltd (SSU) remain in dispute. All the losses sustained in completing or terminating the legacy projects, and the associated legal costs to date, are reflected in the Profit and Loss. There will be some ongoing legal costs in FY2024 until these matters are resolved. Our public classroom training business continued its post COVID recovery during FY2023, but low participant numbers have seen the closure of facilities in Darwin and West Brisbane occasioning a $1.41m impairment charge. The North Brisbane and Jandakot facilities continue to meet expectations as do our in-house corporate training offerings. 12 Safety The health and safety of our people, stakeholders, and the communities we serve remains paramount for the Board and Management. While it is with pride that we can report zero LTIs for the seventh consecutive year, the Board remains committed to Managements’ continuous improvement of our safety culture and performance. Management Focus Our new CEO, Mark Read, has made a positive and palpable impact on the business since starting on 13 March. The Board has given its full support to Mark to implement the management and structural changes required to ensure our business has a sustainable cost base and less on-going exposure to fixed price EPC contracts and to improve our project management and quality assurance capability. With accommodation made by our bankers and support from the Board, Mark and his reinvigorated senior executive team, made the difficult decision in early April to reduce our headcount and our geographical footprint post the end of the onerous legacy projects. As stated above, this impact was seen in the management accounts in May when all business units reported positive contribution for the first time in FY2023. Under Mark’s leadership, the management and staff are absolutely focused on the need to return to profitability in FY2024 and, importantly, to increase our earnings and free cash flow so we can generate an acceptable return on assets for our shareholders. V E R B R E C AN N U AL R E P O R T 2023 Opportunities Closing Despite the challenging operating environment over the past 12 months, Verbrec has maintained a healthy work in hand position. As detailed in the CEO’s report which follows, a welcome addition to our traditional business is to be found in the transition to an alternative energy generation future. Decarbonising the global economy is providing technically exciting and profitable projects for our engineers to be engaged in with some significant clients. Finally, I would like to thank our shareholders for their ongoing support and acknowledge my fellow Board members and all our valued people working across the business for their commitment and dedication over this past year and the one before it. Our collective priority is to achieve the business performance we expect and know is possible in FY2024 and beyond, and to resume dividend payments to shareholders as soon as it is prudent to do so. FY2023 saw the first full year of Verbrec’s licenced software (SAAS) for stockpile management, StacksOnTM, being utilised by BHP Iron Ore at both mines and ports in Western Australia. The StacksOnTM software solution was developed and refined over many years by Verbrec with the development costs expensed, not capitalised. Hence, the product that has emerged, has minimal carrying value on Verbrec’s balance sheet and therein lies an opportunity, not fully recognised by the market, in its valuation of Verbrec. Meanwhile, StacksOnTM is starting to attract interest from other miners in Western Australia. Yours sincerely, Phillip Campbell Chairman Environmental and Social Governance (ESG) Now, without the onerous project distractions occupying Board and Management attention, the Board has committed to the implementation of an ESG framework to appropriately manage ESG related risks and opportunities which are of increasing importance to our stakeholders. Recognition As announced on 20 July, our respected Chief Financial Officer, Michael Casey, has advised the Board of his desire to pursue a new career opportunity. While we work through a timetable for his departure, an interim CFO has been engaged and the Board has initiated a comprehensive search process to identify a suitable replacement for Michael. The Board also acknowledges the contribution of Linton Burns who resigned as a Director of Verbrec Limited, on 14 March this year. Linton was one of the architects of the creation of Verbrec from its progenitors, Logicamms Limited and OSD Pty Ltd. In his time with the Group, starting in 2009, he left an indelible impression on the organisation. We wish him well in his new business pursuits. 13 VERB REC ANN UA L REP O RT 2 0 2 3 Board of Directors PHILLIP CAMPBELL NON-EXECUTIVE CHAIR BRIAN O’SULLIVAN (AM) NON-EXECUTIVE DIRECTOR Phillip joined Verbrec in October 2019 and is an experienced independent non-executive director on publicly listed and private company boards. His executive experience includes MD and CEO roles in a range of manufacturing and engineering businesses, and he has significant experience in business turnarounds then growing businesses to restore value. Phillip has a Bachelor of Electrical and Electronics Engineering from the University of Queensland and is a graduate of the Australian Institute of Company Directors. As the former founder and Chairman of OSD, Brian joined the Verbrec Board in June 2019, bringing with him over 30 years’ experience in business management, project management and engineering, specialising in the design, construction and maintenance of major pipelines and petrochemical facilities across Australia, PNG and South East Asia. Brian’s key strengths include a strong technical knowledge and an in-depth understanding of commercial business activities. Brian has been a company director holding board positions for a range of entities, including Chairman of the Australian Muscular Dystrophy Foundation. MATTHEW MORGAN NON-EXECUTIVE DIRECTOR SARAH ZELJKO NON-EXECUTIVE DIRECTOR Matthew joined Verbrec in October 2019 and is an experienced independent non-executive director on publicly listed and private company boards. He began his career as an Institutional Venture Capital fund manager with QIC Limited and brings significant commercial experience including M&A and capital raising to the Verbrec Board. Matthew has a Bachelor of Commerce from Griffith University, a Bachelor of Applied Science and an MBA from Queensland University of Technology, and was Australia’s first Kauffman Fellow. Sarah joined the Verbrec Board in September 2020, bringing with her extensive executive, operational, governance and advisory experience gained across multiple large ASX listed, government and private corporations. She is recognised for her commercial acumen in negotiating commercial agreements, and experience in capital raising, M&A, construction, infrastructure and project management. Sarah is a Graduate of the Australian Institute of Company Directors (GAICD), a Graduate of the Australian Superannuation Trustees (GAIST) and an admitted Legal Practitioner. 14 V E R B R E C AN N U AL R E P O R T 2023 Engineering a digitised, net zero carbon future. 15 VERB REC ANN UA L REP O RT 2 0 2 3 CEO’s Letter to Shareholders Dear Shareholders, It is with great pleasure that I present Verbrec’s Annual Report for the financial year ended 30 June 2023. I want to take this opportunity to thank everyone for their warm welcome to me as our new Chief Executive when I commenced on 13th March this year. Commitment to Safety As an engineer with more than 30 years’ global experience, I am truly humbled to be leading such a great organisation with a team that possesses technical expertise and capabilities that are the envy of many of our competitors. In addition, we have taken actions to improve the way we think about safety, aligning our systems and processes to have an even greater focus on proactive, leading indicators in line with ISO45001 : 2018. I also wanted to acknowledge the work of former CEO Linton Burns and the Leadership team over the past three years. Clearly, we are well placed to build on Verbrec’s world leading reputation, and work as a collaborative, cohesive unit to deliver exceptional value to our clients. Financial Performance Financially, however, it has been a tough 12 months, highlighted by an economic slowdown, the cessation of the final of three legacy projects and a challenging market environment. Despite that, there are indications that we are turning a corner, with a positive EBITDA recorded in the months of May and June 2023 (excluding legacy project impacts and other one-off’s). For the full year, Verbrec recorded total revenue of $118.2m and a normalised EBITDAI profit of $4.3m. Our work in hand remains strong leading into the new financial year. 16 Safety is also a key performance indicator, and I am pleased to report that we to hold a 0 LTI record throughout the period, as we have for several years now. Moving Forward Like most organisations across the region, the economic slowdown was having an impact on both revenues and our cost base and, if we were to move forward, we needed to act. Regrettably, that involved some ‘right-sizing’ and staff leaving the business as we matched our resources to current workload and near-term expected market demand. In addition, we restructured some elements of the business and refreshed the Leadership Team. A series of key activities designed to support a more sustainable future for the business and, importantly to grow it, was initiated. This included the development of a shared commitment to look forward to future successes; aligning as a strong team and working together to support each other; rebuilding client relationships through the reintroduction of Key Account Managers; enhancing our systems and processes to improve operational efficiency; and focusing on more consistent project delivery standards. V E R B R E C AN N U AL R E P O R T 2023 Across the firm, there has been strong agreement about the need to work towards better internal career progression and developing more sustainable pathways for our people. This will essentially revolve around putting the right people into the right roles and better managing our considerable talent. With the Net Zero transition firmly underway, we won an Advanced Battery Project in Queensland with a Tier 1 Electricity and Gas Provider, to investigate the merits of three battery technologies that are being considered for installation beside an existing major power station. Great Projects In New Zealand, Verbrec was awarded the detailed design engineering contract from Gas Services NZ, part of the Firstgas Group for the balance of plant at the Broadlands Biogas Upgrading facility. It is pleasing to report that our clients have responded positively to our moves. This is just a small taste of the outstanding work being delivered by Verbrec for clients across the region. We have secured key contracts with blue-chip organisations like Santos, Origin, Australian Gas Infrastructure Group (AGIG), APA, Epic Energy, Arrow, Todd Energy, BHP, First Gas and Power & Water Corporation. In Closing We’ve also been involved in several outstanding projects such as the multi-award winning ToolTek Vehicle manufactured by WEIR ESCO and now being used on mine sites like Rio Tinto. Our Training business designed a breakthrough theory and practical skills training package using virtual technology for the safe and cost-effective use of the ToolTek Vehicle. Verbrec’s Infrastructure Services division is one of the largest and most respected independent pipeline operators in the region, with more than 20 pipelines under management. Over the past year, our team was awarded the 6-kilometre-long Shoalhaven Starches Bomaderry Gas Pipeline (SSBGP) operation and maintenance contract the first pipeline operation and maintenance contract for the company in New South Wales. Verbrec was appointed by the Australian Gas Infrastructure Group (AGIG) and foundation miner Mindax, to carry out a pre-feasibility study for the Mid-West Shared Infrastructure Project (MWSIP) in Western Australia. This project, which was conceived by Verbrec some eight years ago, involves the potential use of common hydro transport, power and water utilities, along with common transhipping solutions at Oakajee Port for the miners of the Yilgarn Mining Province of the Mid-West, inland from Geraldton, to commercialise the vast Magnetite iron ore province. I firmly believe that Verbrec is ideally positioned to expand the offering it provides to current clients, as well as developing new markets, particularly within the renewable energy and digital technology space. With the actions we have undertaken to date, and a refreshed strategy being developed, we are well placed to improve the Company’s financial position in FY2024. I look forward to delivering on the next stage in the evolution of Verbrec – building upon our purpose, increasing the brand’s value and enhancing the environment in which we can all grow and flourish. If we do this well, and I am sure we can, it will result in strengthened relationships with our key clients, provide staff with the opportunity to work on great projects, whilst delivering outstanding value and returns to our shareholders. Yours sincerely, Mark Read CEO Our Asset Management team provides asset management solutions that increase efficiencies, reduce costs and improve productivity. For instance, they’re now helping a number of clients harness the power of artificial intelligence (AI) and ChatGPT to enhance their Asset Management capabilities. 17 VERB REC ANN UA L REP O RT 2 0 2 3 BRAD LOVE ACTING CHIEF OPERATING OFFICER Our Executive Team Brad is a Project Delivery, Project Controls and Business Systems professional with more than 20 years’ experience across a range of industry sectors both client side and consultant side. As a degree qualified Mechanical Engineer, with a career originally forged in the manufacturing sector, Brad has a strong background in Lean methodology and a passion for process improvement. MARK READ CHIEF EXECUTIVE OFFICER MICHAEL CASEY CHIEF FINANCIAL OFFICER Mark Read has been appointed Chief Executive Officer of Verbrec effective on 13 March 2023. Mark is a resultsfocused senior executive business leader, CEO and Board director with a proven record of successfully establishing, transforming, acquiring and growing businesses to improve profitability, enable international expansion and achieve sustained growth. Over 30 years’ experience across publicly listed and privately held global engineering service companies with roles ranging from global enterprise management, engineering, project management and in turnkey construction through to operations and maintenance in a wide range of industries. Michael is an Australian Chartered Accountant with over 20 years’ senior finance experience. Prior to joining Verbrec, Michael held senior finance and commercial positions in companies including FLSmidth, Ausenco and Cardno, and he has significant listed entity experience. Michael is responsible for all of Verbrec’s finance functions and other Corporate Services including Legal, Contracts & Procurement and ICT. He holds a Bachelor of Business from the Queensland University of Technology, is a member of Chartered Accountants Australia and New Zealand, and is a Graduate Member of the Australian Institute of Company Directors. JOEL VOSS COMPANY SECRETARY, CONTRACTS & PROCUREMENT MANAGER ALAN GREGORY GENERAL MANAGER, TRAINING SERVICES Joel is a Contracts, Proc