Austin Engineering Limited (ANG) Earnings Call Transcript

Thank you for standing by, and welcome to the Austin Engineering FY '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. David Singleton, CEO. Please go ahead.

Hi. Good morning, everybody, and welcome to the Austin Engineering FY '22 results presentation. This is David Singleton. It's interesting, it's a year now since my first presentation on Austin Engineering. And it feels like the business has changed quite dramatically in that period and to delight really to be able to go through some of the features of the business as we will do over the next 15 to 20 minutes. You'll remember that this journey, at least for me started a little bit over a year ago when I was on the Board of Austin Engineering and the Board wanted to carry out a strategic review, which I agreed to do. One of the things that we identified with Austin was it had a very strong brand as a business. And in the market of customized truck trays and buckets for the mining industry, it really does have the strongest brand in the world. We also identified that the company provided strong operational advantage to mining companies. That is to say that the efficiency improvements out of these customized products have a really significant impact on the overall efficiency of mining operations of both mining services companies as well as the mining companies themselves and therefore, presented a great deal of financial opportunity to them. The other thing we identified was that the business had good international reach, which meant that when we were developing and improving products, we were able to sell those products across a broad spectrum of companies around the world. And that a gave unique position nobody else in the world other than the big OEMs has anything like that kind of coverage. However, when we looked at the business, we found that the financial performance of the business in some parts of the business were not what we would have expected. And that was an area that, obviously, we put a great deal of focus on. As a result of that strategic review, we put a new plan into place, which we called Austin 2.0 with a number of elements to it, some of which I'll touch on as we go through today. I'm going to turn now to Slide #2 in your pack, which gives the financial highlights for the business over the last 12 months. And as you can imagine, as you read down through these highlights, it's a great pleasure to be here talking about them today. NPAT up over 5x to $20.6 million, but also importantly, well ahead of our initial guidance, which was $18 million for NPAT, again, well ahead of last year's performance. And as a result of that earnings per share are up to $3.55 per share, again, 5x increase from last year. Revenue up 3%, although actually, the performance on revenue is much stronger than is apparent for that number. Principally, and Gareth might talk about this a little bit later, but principally because in FY '21, we pulled forward -- or the company pulled forward quite a significant amount of revenue from FY '22 into the FY '21 year and as a result of that bolstered the number in FY '22 and reduced the revenue impact in FY '22. So if you go back and reallocate all of that, you'll see that actually revenue is up quite strongly in the FY '22 year. And I think that's been a good feature of the business and perhaps hidden by the way things fell. Couple of things. I'm very pleased about with the business, and I would like to emphasize on this slide is that net debt is now down to $1.2 million. The end of FY '21, it was $9.6 million of net debt and in fact, had increased to $18.6 million of net debt at the end of the half year. And I think that improvement in cash flow in the business really represents the performance of the business going forward as well. The order book is up 50%. It's probably one of the most pleasing numbers that I see on the chart here today, not because it's more important on those other numbers, but because it gives us a real indicator to how the business is likely to perform through the FY '23 year. And then post the end of the results, and we talked about this last week, we completed the -- sorry, we announced the acquisition of Mainetec, a very innovative, high-quality mining bucket builder based on the East Coast of Australia. And I'll talk a little bit more about the impact of that later on in the presentation. I'm going to move forward now to Slide #4. And this just graphically outlines the improvements that we've seen as we've started to implement Austin 2.0. And I use the word started very clearly in the sense that we're a long way away from the full impact of the changes we've made in this business hitting all the financials. So there's a lot more runway left. But we've seen the percentage EBITDA numbers increase from what was in that range, 8% to 10% over the last few years, jumped in FY '22 to 16%. And I think very meaningful change in the performance of the business in such a short period of time. And then that translates, of course, to a much stronger NPAT and therefore, a return on equity, which has increased from what was typically around 10% and below up to 19% during FY '22. And that's always -- for me, personally, is always a key figure to keep an eye on to make sure that the way we are investing in the business meets high hurdles. So I'm going to -- we're going to move forward to Slide #15 now, and I'd like to introduce Gareth Jones, who's the Chief Financial Officer, and will take you through some of the detail of the financial results.

Thank you, David, and good morning, everyone. Before we get into the numbers, I just want to just point out again that the figures in the presentation are on a statutory continuing operations basis and where necessary, any FY '21 comparators have been restated with discontinued operations. So just moving on to the table on Slide 16. Just look at financial performance. As David has already alluded to, we've seen a solid turnaround operationally in FY '22, and this has delivered a significant improvement in financial performance. And David already says, as you mentioned, the $5 million increase in revenue is -- there's 2 parts to that in terms of the story. It's the impact that COVID has had in Western Australia, but more so the pulling of work forward into FY '21. And what we've, therefore, seen in FY '22 was a slow start to the year, impacted by work shifting, but then a steady buildup. So the second half of the year has been significantly ahead of the first half of the year. And what we will see now is that trend continuing through FY '23. And I think that the key highlights really for me in this year have been the major turnaround that has been in both North and South America. And North America has had the highest EBITDA percentage that they've ever achieved. And in South America, we've got profit pretty much for the first time since we acquired those businesses. So it's been a tremendous turnaround that we've seen there. So that improvement, combined with the restructuring and cost efficiency measures that were implemented early in FY '22 as part of the Austin 2.0 strategy have really delivered a significant improvement in EBITDA, which is up 155% on last year to $32.5 million and a 16% average EBITDA margin for the year. So again, that's -- we've ended the year in a very, very strong position. Depreciation and amortization have fallen year-on-year, and this is due to assets being held for sale. We made the decision at the end of FY '21 to close some of the unprofitable operations that we had in South America. So those assets stopped depreciating and we've seen the benefit of that in that fall in depreciation and amortization. There was also some amalgamation of a consolidation of operations on the East Coast and all of those properties that were involved with those businesses have now been sold, and I'll touch on that on the cash flow slide in a moment. We've also seen a 40% or greater than 40% reduction in interest cost, and this is as a result of the new HSBC financing facility that was put in place from August last year. So that's really benefited us tremendously in terms of the interest rate that we pay on that facility. And I think that, again, the thing we should be celebrating here is where we've ended up with NPAT of $20.6 million, it's 500% plus up on last year and exceeded guidance. And I think that's just a testament to all the hard work that the business has put in to delivering that operational improvements and the financial improvement that's come off of the back of that. So I'll just move on to Page 17 now on the cash flow. And the big turnaround on the cash flow has been the swing from an $8.3 million outflow in '21 to a $4.7 million inflow in '22. The table will just look at a reconciliation from EBITDA. So again, the key -- I'll just highlight on the key movements here. So working capital is, as usual, I think one of the big players in cash flow movements. And this is due to work in progress. So we -- as I mentioned, H2 was a strong year, but it was strengthening as we went through H2. So if you look at the last quarter of the year, activity kept increasing through April, May and June. So it was ramping up right through the entire last quarter. So as a result of that, we've actually -- of that $12.4 million movement in working capital, $11.3 million of that is in work in progress. So it's a good position to be in. And obviously, that will start to unwind as we get into the first quarter of FY '23. Movement in receivables and payables, as you see on the next slide in a moment, net each other off. The other cash outflow was income taxes paid and finance costs of $2.7 million. And then lastly, in an operating cash flow perspective, the other movements are made up of the release of a few provisions. And these were the restructure and the move of the head office from Brisbane that happened at the start of FY '22. So those provisions have been released, and there was a bit of rework that was required, and there was a provision for that, which we've released. There was a $4.4 million movement as well in a finance lease receivable and this is in relation to a contract that we have in South America. And the other part of the $9.7 million is the gain on the disposal of the properties that I just mentioned of $1.9 million. So that's what allowed us to end in a much stronger position than we've been in the past with a $4.7 million inflow. Moving on from cash flows -- from investing activities. So we had 3 major properties, 1 in Colombia, 1 in Chile and 1 in Mackay that we've sold. So the proceeds from the sale of those properties plus another plant and equipment is $12.9 million inflow for the year. And we've reinvested part of that money into capital projects. So of the $4.2 million, the bulk of that has really gone into the advanced manufacturing that's been implemented in Perth and also in Indonesia. And finally, from a cash flow perspective, we paid $2.7 million in dividends through the year for the interim and final dividend. So that basically meant that we had a net cash inflow for the year at $10.7 million. If I just move on to Slide 19. And this is just some highlights on the balance sheet movements. So David has already mentioned the significant improvement we had on net debt down to $1.2 million, which is a tremendous result. Couple of the ratios on that. So I just wanted to highlight really that we're tracking well below the covenants required under our HSBC facility. And that will continue -- even though we've taken on the new debt facility for the Mainetec acquisition, we'll continue to track below the covenants that we have in place there. And again, in terms of looking at working capital on the table on the right-hand side, just highlights that you can see that it's work in progress as the key movements. Raw materials remaining flat. We're ensuring that we maintain sufficient stock to manage supply risk not just in terms of delivery but also in price. And the movement on receivables and payables pretty much net each other off. So the story on working capital movement is all around work in progress. And finally, we've -- the dividends that we will declare for FY '22 will be maintained at $0.03 per share with a record active seventh of October and payable on the 27th of October. So at that point, I'd just like to hand back over to David and move on to Slide 23, if you could, please.

Okay. So Slide 23 deals with strategy of the business. And everything we do, of course, is anchored in a forward-looking medium-term strategy for the business. And probably the best way to think about that now is that we are pursuing 2 things. One is clear cost leadership against our competitors. And the second thing is to make sure that we've got product leadership as well. And I'll deal with those 2 things over the next couple of slides. As far as cost leadership is concerned, it really comes down to 2 things. Our business is relatively straightforward. It has 2 major components to it. One is steel and the other one is the application of labor to turn that steel into products. What we've identified is that outside of the major OEMs like Caterpillar and Komatsu, we're one of the largest buyers of high hard, high-quality steels in the world. And that has allowed us to, for the first time, start to aggregate our steel purchases across all of our businesses and to go directly to the steel mills, both in Europe and Australia and in the United States and compete for that steel production. And as a result of that, we're confident that not only do we now have access to the cheapest steel for our products. But actually, it is significantly cheaper than many of our competitors. And that gives us an in-built competitive advantage and that we can continue to maintain. In addition, the second part, remember, of that cost base is labor. And Austin is quite unique in having a well-established business based in a low-cost manufacturing country in Indonesia. We've had our Indonesian business for 12 years. And again, we've realized that this business can give us a tremendous cost competitive advantage, not only cost but also access to labor, where in Indonesia, we find that we have a new inexhaustible access to skilled labor, which is completely the opposite to what we find in Australia, of course, but also in North America and South America. And so our ability to bring cost leadership really gives us the ability to compete effectively. Now I'll make it clear, and I've said this a few times before that our objective is to have cost leadership, not price leadership. And the way that we deal with that is to make sure that we've got the best products or we've got product leadership as well. And if we bring those 2 things together, then that cost base that we've got can really transfer into margin improvement, some of which we have seen this year. And I'll emphasize that we're really at the beginning of the implementation of this. We've certainly seen cost improvements for advanced manufacturing and the procurement processes this year, but there is still a long way to go in the implementation of that and therefore, a lot of benefit to come. So I'm going to turn now to leading products, and I'm going to go to Page 24 for any of you following the presentation yourselves. And you'll know that last week, we announced that Austin would buy the Mainetec business in Australia, Mainetec originally based only on the East Coast of Australia, but now has a manufacturing plant on the West Coast near Perth as well in Henderson, near Perth. Where I was the first introduced to this business actually by one of our key customers who said to us that they were great supporters of the Mainetec bucket product and -- but felt that the business needed assistance to grow and develop, needed R&D type dollars and support in order to grow their business and felt that the business would probably be up for sale. That was about 9 months ago, and we've made it our job to get to know Mainetec well, get to know the founders and the directors of that business and their business well and that has led to the acquisition that we announced last week. I'm really excited about this acquisition. I think it's going to create a whole new dimension to the business, and of course, fits in very well with the core business. Mainetec produce a premium product for -- called the Hulk Bucket, which has particularly -- has particular applications in very demanding environments hard-rock lithium and iron-ore type mines would be significant users of this type of equipment. They are also a designer of dipper bucket systems. Now for those of you who are not familiar with dipper buckets, and I can tell you a year ago, I wouldn't -- these are the largest buckets in the mining industry. They're worth about $1.5 million to $2.5 million a piece. And so very material in the revenue base. And Mainetec has carved itself out a position producing upgrades to dipper buckets and are now present on 26 of the 31 systems that exist in Australia. So they've really got themselves into a preeminent position. And if I'll tell you one more fact you'll understand why we're interested in that. There are 31 dipper buckets in Australia, the most -- world's most sophisticated market. In North and South America, there are 450 active dipper buckets that we can now access through the Austin companies in those countries. I'm going to move now to Slide #25. And you'll see that we bought Mainetec on an EBITDA multiple post synergies of 2.3. And based on broker reports from Euroz and from Petra, we have an average Austin -- EBITDA multiple on the same basis of around about 5x. So you can see from an accretion point of view, it's a very positive acquisition. But that's not really the main game. If you look in the central box here around cost-based synergies, you can see what I was talking about earlier is going to create great leverage in this business. Our steel costs in Austin are less than half what the Mainetec business was paying. And so we get an immediate synergistic benefit through just bringing our steel costs into the Mainetec business. And that's a relatively straightforward thing to do. We've already done it with our own business. And all we have to do and are doing right now is extend that into Mainetec in order to deliver some of those synergies. And secondly, the labor cost savings and access to labor that I talked about through using Indonesia as a hub for manufacturer of systems and subsystems for these pieces of equipment is now also available to Mainetec as well. Now that takes a little bit longer to bring that into the supply chain. And that will take a few months for us to get that up and running as opposed to steel, which will happen in a few weeks. But nonetheless, we'll start having an impact on the cost base of Mainetec through this year. And they are the 2 things that will drive a real significant increase in the value of the Mainetec business. And in that synergy analysis, those cost base synergies are the only things that we put into our analysis. What we didn't do was add in on the third box here is the market-based synergies that we talk about, which is the ability for us to sell the Hulk premium range of buckets into the Americas. And probably the piece that I'm most excited about is the ability for us to take the strong and commanding position that Mainetec has in the dipper bucket market in Australia and move that into the Americas, where the market is well over 10x larger than the market that they have done so well in Australia. And that's really why we see this businesses adding so much to what we're doing. Last thing I'm going to talk about before we bring things to an end is, I remember talking a year ago about how we were going to invest in new products for the business. And we have done that, and we've launched 2 new ranges of products in the last few months. Slide #30. For those of you using packs, you will see a launch of a new tray called the HPT, high-performance truck tray. It's our lightest ever truck tray and Austin has always been known for lightweight truck trays. It's our lightest ever truck tray. And in this particular application, gave the mining company, a leading mining company, 7.3 tonnes more payload per journey. Now that -- just to move that into numbers for you. That creates an extra $2.8 million worth of ore per truck tray per year. So if you think about the impact that, that's having on the miners who will have -- the large miners will have hundreds of these truck trays going backwards and forward. The impact is hundreds of millions of dollars of additional payload that can be carried with this truck tray. And therefore, the importance to them as a company, very high. And for us, it's actually -- it's been product engineered to be easier to build. So it's actually a lower cost truck tray for us at the same time but can command the premium price. And that's what delivers on the sort of issues that I've talked about before about how we get product leadership and cost leadership and that translates into better margins in our products. Move now to Page 31, which highlights the launch of our HPX bucket range. This is a new range of high-performance buckets, with significant improvements over the bucket ranges that we had previously and has been part of the successful sales increase that we've seen in buckets over the last 12 months. And I've reported a couple of times previously that bucket sales have increased by 4x over the last 12 months to the year before compared to the year before. And a lot of that is on the back of this new bucket range that we have launched. I'm going to go to the page that I'm sure you all turn to first when you picked it up this morning, and that is the outlook page, that's in front of you. So for those of you reading packs, this is Page #33 in your packs. From a general market point of view, we continue to see strength both in North America, South America and in Australia, notwithstanding the kind of choppy markets that we're seeing around the world with all sorts of macroeconomic concerns. The mining industry itself, as many of you will know, is -- continues to drive forward strongly. Our market in the mining industry is really about tonnes moved. It's not a capital -- we're not related to the capital investment market but we are related to the numbers of tonnes mined and moved by the major miners. And we see strength in that in oil sands, strengthening coal and resilience in hard rock and iron ore as well. So the basis of that business continues to look pretty good to us. That's led us to give guidance of an increase in our net profit after tax by around about 17% to circa $24 million, which will be a record for this business. And I'll just emphasize that, that excludes any contribution from Mainetec. And the reason for that is that we will update guidance when we've had a little bit more time just to make sure that we're clear about the contribution that Mainetec will make this year. And I think we've already given you some indications of that previously. Company order book at the end of the year was at $135 million, and that's $50 million up from last year. So that suggests that we've got a strong run into the first part of FY '23. Okay. At that point, I will bring the presentation to hold and hand over for questions.

[Operator Instructions] Your first question comes from James Lennon from Petra Capital.

Great results. Just a quick one for me. I think in here, you've mentioned that you've still got some noncore assets held for sale, only about $1 million now. I'm just keen to know what we can expect in terms of -- is there any more reorganization or discontinuing the businesses that you expect to make? Or should it be fairly clean this time next year?

James, it's Gareth here. No, it's -- so no other restructures or reorganizations going on. So what we've got left here is a property that's -- it's an office that we've got in Peru. Now that's on the market and being heavily marketed at the moment. So we expect that to be sold through the course of this next financial year and just some of the minor assets, which are on the East Coast that should go as well. So that should be it then, and we'll be on a clean slate moving forward through FY '23 then.

[Operator Instructions] Your next question comes from Patrick Moore from [ KNP Super ].

Patrick, I don't know whether you're speaking and got on your own mute, but we can't hear you. No, we now need to move on.

[Operator Instructions] Your next question comes from Trent Barnett from Euroz Hartleys.

Just on the margins in the Asia-Pac, they were a bit weak in the second half. I mean, is that already rebounded now that COVID impacts over or might take to the second half of FY '23?

Trent, good to talk to you. I think it will take a little bit longer than that. I think that will probably start to bounce back in the second half. We're certainly seeing strength come back. And we're not so badly affected as we have -- we were in the early part of the second half but it will take a little bit longer for that to come back fully. I think one of the features, and I talked about it in the announcement is that we've kind of, in some ways, been a little bit of a victim of our own success in Australia and that we've got a lot more product diversity in our order book in the second half of the year moving into FY '23. And that's as a result of winning a lot more bucket work and also winning truck bodies with different customers and in different locations than we had previously won, and that's been a really good outcome. That change in diversity from a very consistent manufacturing approach in Australia to one where there are a lot of different products going through has sort of brought down efficiency levels and therefore, margins into that business. We'll get used to that, and we'll understand how to cope with that, and that will take us a little bit of time. It's really a good thing, but it has kind of changed the profitability of that business for a while. So I think it will be further into the back end of this year that we'll start to see that recovery.

Okay. That's great. And I guess that leads into obvious growth for that division in FY '24, if margins are sort of on the growth, meaning FY '24 from here that [indiscernible]