Austin Engineering Limited (ANG) Earnings Call Transcript

Thank you for standing by, and welcome to the Austin Engineering FY 2025 Results. [Operator Instructions] I'd now like to hand the conference over to Mr. Sy van Dyk, Austin Engineering CEO and Managing Director. Please go ahead.

Good morning, and welcome to Austin Engineering's investor briefing addressing the results released today. Thank you for taking the time to join us. As you all know, I'm a few weeks into the CEO and Managing Director position, and I'm pleased to be presenting the results in this capacity. Today, I'm joined by our Chief Financial Officer, David Bonomini. Together, we'll run through the investor presentation lodged on the ASX this morning and then provide an opportunity for any questions at the end. As always, before we begin, I would like to draw your attention to the disclaimer on Slide 2, which covers the usual important information around forward-looking statements. Turning to the agenda on Slide 3. I'll begin today with an overview of the key results, along with an update on our South American business before passing to David, who will take you through the financials in detail. I'll cover the regional financials and operational results as well, then update you on our guided metrics for 2026. Then we'll move into the Q&A at the end. If you could please turn to Slide 6, financial year '25 results highlights. Full year 2025 was marked by another strong year of sales and manufacturing growth for Austin against some market challenges, and I'm pleased to report a solid underlying operational performance for the year. We have embedded our 3 operational pillars across the business: product leadership, customer focus and manufacturing excellence, and I intend to continue to build on these pillars in the coming year. We recorded a lift in revenue across all business units with group revenue up 22.2% to $376.7 million. North America was a standout in the group with a 54% increase in revenue for the year, thanks to a 48% lift in tray sales and increased bucket sales as well, which we could handle because we have expanded our capacity and added a lease facility. APAC made a solid contribution to profit and margins driven by Indonesia's and Australia's manufacturing efficiency, along with the impact of our AustBuy bulk steel procurement arm and an improved bucket sales. This has led to the group's underlying net profit after tax increasing 70% to $40.4 million, while statutory net profit after tax was $2 million higher to $26.3 million. You can see our underlying EBITDA improved by 30%, while statutory EBITDA fell by 4.2%. Our Chile business unit's profitability was impacted following the award of a large OEM contract, which unfortunately created significant inefficiencies. We've made changes in Chile that I'll address shortly, but moving part of the production to Batam has alleviated some of those pressures and allowed us to meet contract requirements. Our operating cash flow has fallen to $2.6 million. We had a buildup of working capital inventory to meet future demands from customers in Chile and the APAC region as well as an increase in trade receivables from the APAC and U.S. sectors. We maintain a solid order pipeline, but the order book is softer year-on-year. This is, in our view, all due to timing of order receipts, and we are still confident on the year ahead. The Board has declared a fully franked financial year '25 final dividend of $0.009 per share. With the interim dividend of $0.006, we've taken the full year dividend to $0.015 per share. This is up 25% year-on-year. Please turn to the next slide, and I want to speak about our South American business and explain how we are going to overcome some of the recent challenges we have faced in that division. We took on a large OEM contract and faced margin pressures in the fast ramp-up that was required to deliver the products, largely through labor and steel productivity issues. Capacity in Chile became strained and we shifted some of the production to Batam to manage the overspill and deliver on the contract, and that is working well. Subsequently, we have identified an accounting error in that unit, where some product revenue has been booked prematurely, and we restated our financial year '24 accounts as a result. I want to reiterate that the situation is confined to the Chile division. Once we work out where these problems were, we've put in a series of measures immediately to strengthen communications and processes in that region to ensure it is mirroring the practices of the other divisions. We have appointed Max Flores as Vice President for the entire America region, who will report directly to me. The new general manager has come on board in Chile, who will report directly to Max. The North American business has a strong and effective leadership team, and we are going to use that team to implement the same operational and financial processes in Chile. More widely, financial managers in all regions will be reporting directly to our Group CFO. We want to ensure every region is operating with exactly the same processes in place. We are spending a lot of time centralizing our systems globally, and making sure Chile is operating properly is another main focus of mine this year. I'll now hand over to David to go through the results in more detail.

Thanks, Sy. Hi, everyone. I will start with the overall performance of the group and then take a closer look at how each region performed and then finish with the balance sheet and cash flow. Turning to the group's P&L on Slide 9. The group's revenue is up 22%. The big driver here was the U.S., driven by a strong order book, a market-leading product and increased production capacity. EBITDA was up 30% with APAC really stepping up and improving margins. Depreciation and amortization was broadly flat, a bit higher in the U.S., offset by other regions. Tax was lower than last year with the additional deferred tax benefit recognized in Australia. And bottom line, underlying net profit was up 70% that reflects stronger performances in both APAC and the U.S. Now turning to Slide 10. Referring to the EBITDA percentage margins chart on the left, as you can see here, margins have steadily improved as we have focused on operational efficiency. From just 6% in FY '21, we have now lifted to almost 15% in FY '25, our best results so far. That's been driven by production efficiency, stronger product performance and tighter cost management. Turning to the return on equity chart on the right. The improved margins are flowing directly through to returns. If we look at the return on equity, we have gone from just over 10% in FY '21 to more than 28% in FY '25. That's nearly a threefold improvement in 5 years. It shows not just higher profitability but also better use of capital that we have invested across the business. Now moving to revenue on Slide 11. Looking at revenue by region, North America was a standout, up 54% to $147 million, driven by the new facility and a larger order book. APAC was up 4% to $173 million. South America grew 21% to $56 million, supported by the new OEM orders. Turning to Slide 12. The group's underlying EBITDA was up 30% year-on-year, reaching almost $56 million. APAC led the way, building on last year's momentum by leveraging Indonesia's production efficiency, stronger bucket performance and good results from AustBuy. North America also grew profit driven by the expansion of their facility and the expanded contractor partnerships in Canada. In South America, profit performance was softer. That was mainly due to the acceleration -- operational expansion to meet the OEM demand, which impacted labor and steel productivity. So overall, EBITDA is up strongly with APAC leading the charge, North America improving and South America expected to turn around in FY '26 with the support of the U.S. team. With the P&L results in mind, let's now turn to working capital for the year on Slide 13. Working capital was up $29 million this year. Most of that came from high inventory and receivables. What's pleasing though is raw materials fell by $23 million since December. We've seen more of that flow into work in progress as production ramped up towards the end of the financial year. Receivables moved in line with revenue. Payables were a bit lower because of the timing of steel supplier payments, and customer advance payments held steady. So overall, working capital lifted to support growth. There are opportunities to improve, especially in South America, where we expect continued reductions in raw materials to occur. Now turning to cash flow on Slide 4 (sic) [ 14 ]. Our closing cash balance came down by $20 million, finishing the year at $20 million compared to $40 million last year. We generated $15 million in operating cash flow, which was impacted by the $29 million increase in working capital. As mentioned on the previous slide, we expect working capital to reduce further in FY '26. There was $12 million in tax and interest payments, along with $9 million allocated to capital expenditure, primarily designated for the U.S. expansion. All up, that meant a negative free cash flow of $6 million. While EBITDA was strong, cash conversion was lower this year as we invested in growth and carried higher working capital to support that sales growth. Turning to the balance sheet on Slide 15. The balance sheet remains in great shape, assets of $300 million, net assets of $144 million. Net debt moved to $12.8 million compared to our cash -- net cash position last year, which was used to fund working capital for APAC and Chile and fund the U.S. expansion. The net debt-to-equity ratio sits just over 8%, so still a low-geared position for the group. Turning to the order book on Slide 16. The order book chart highlights a 21% decline in the order book growth rate year-on-year with APAC down 18%, North America down 31% and South America up 2%. We believe the order book at the end of June is due to timing issues. The orders can be lumpy, the large customers historically placing orders during the first half of our financial year. Since the 30th of June, the group has secured an additional $28.6 million orders. We will continue to capitalize on the group's growth opportunities and focus on improving the group's profitability and cash conversion. Thanks for the opportunity to share the group financial performance. I'll now hand you back to Sy.

Thanks, David, and I want to now provide a brief update on our global regions and how they performed over the year. Turning to Slide 19. APAC delivered revenue of $173.3 million, up $7 million from FY '24 and represented 46% of group revenue. Trays accounted for 54% of sales with growth of $10.5 million or 12% in that product line. APAC had an impressive margin performance, up 9.7 percentage points year-on-year because we're seeing operational efficiency in that region, both in Australia and Indonesia. Investment in our sales teams and improved customer support resulted in more customer acquisitions and a rise in spare parts sales with the other product category sales rising 21%. Going to Slide 20. As I mentioned before, North America was again a standout with a 54% increase in revenue reaching $146.8 million. This is due to expanded capacity in this region through the lease of a new facility and expansion of our existing facilities, allowing the team to take on more orders and increase its output. This is a strong business unit, and tray sales were up 48%. The cost of that expansion has impacted margins, but I expect it to improve now that the expanded capacity is in place, works are complete and we are fully operational. We effectively shield the business from any impact of U.S. tariffs on imports and counter-tariffs by establishing a supply chain for truck tray subassemblies using Canadian contractors. This has proven the mobility and flexibility of the Austin business. To the next slide, Slide 21. And in South America, we recorded a 21% rise in revenue for the year on some large contracts, but margins were significantly pressured, as I've mentioned, on labor costs and production inefficiencies due to the fast ramp-up to deliver on that OEM contract. We are in a recovery mode here, and I'm confident we will return the business unit to target margins. Please turn to Slide 23. As I've mentioned before, our overarching strategy focus on 3 pillars: product leadership, customer focus and manufacturing leadership. I intend to continue to concentrate on these areas, ingrain them into the business as a basis for growth. Under product leadership, we continue to design and engineer products that meet the changing needs of our customers for productivity, efficiency and sustainability guidance. Products like our HPT trays are meeting those needs. Our products are delivering the best performance and return on investment to customers. And we have complementary products like austIQ, a technology platform that is providing wear monitoring and then replacement insights to our customers that will lower their cost of ownership. Under customer leadership, we continue to build our sales and marketing programs and make sure we are always improving on before, during and after-sales service to customers through the life of our products. And in manufacturing leadership, we are focusing now on making sure centralized operational systems are in place for the whole company. There has been a strong focus on training the team in lean manufacturing processes, increasing productivity, value adding for our customers and to reduce waste within our operations. Please turn to Slide 30, where I want to step you through my priorities in FY '26. You can see here we are continuing to strengthen our focus on safety across all regions by focusing on both leading and lagging indicators, concentrating on our people, building strong teams and then getting the best out of those teams. On operations, continue with the rollout of the Austin Way. This is our global initiative to roll out common processes and systems as well as implementing best practice across the globe. Further Chile recovery is high on my list as we have already discussed. Customer focus. We are focusing on increasing market share and bringing new customers into the business to generate new revenue leads, including geographical expansion. Finally, continued focus on technology and how it can benefit the business and our customers. Please turn now to Slide 31, where we are providing financial year '26 guidance that continues the growth trajectory for the business. I'm confident we have the team and operations in place to achieve this. For FY '26, we see revenue of between $390 million to $410 million and an underlying EBIT of between $40 million to $46 million. Thank you for your time today. David and I are now happy to take any questions you might have.

[Operator Instructions] Your first question today comes from Philip Pepe from Shaw and Partners.

Very, very positive outlook. Just bigger picture stuff now that you've been official Chair for a few weeks now. In terms of the longer-term demand from, say, your top 2, top 5 major customers, some of them are exposed to iron ore, et cetera, gold, copper, coal, what's the outlook like since you've taken on the Chair? Is it challenged because of volatility in commodity prices? Is it stronger for longer because of what's happening with production volumes? How do you see the 5-year view for Austin rather than just the next 12 months?

Yes. Thanks, Phil. Thanks for the question. I guess if you -- I think the great thing about Austin is we are not exposed to commodities directly. We are more exposed to the production cycle. And if you look at the long-term production cycle of all the main commodities, that has an uptick forecast, right? So if you look into the future and our replacement cycles, we see more work coming our way rather than worrying about the commodity cycle itself. And then if you pivot to -- and that's -- if you look -- if you then pivot to North America, where the current administration is very pro mining, and that's why we're seeing such a huge uptick in North America, as a consequence, we continue to see that moderating up. And there's a lot more development in North America. South America, where we operate -- we operate in Chile, but there's a huge market there, a huge copper market adjacent to Chile. And then there's also different geographical expansions that we can grow into like Brazil, et cetera. So yes, we see the forward outlook very positive for our business based on the fact that we are a wear item supplier. I mean our bodies wear every 3 to 5 years. There's a replacement cycle that has to take place. So hopefully, that addresses your question.

[Operator Instructions] Your next phone question comes from Marcus Barnard from Bell Potter.

Just how are you seeing competition in the truck tray market? I know it's a very localized market, but I just wondered if you're seeing any increased competition, particularly thinking about issues in South America. I wondered if some of your competitors are more active in that market given your issues in supply.

Yes. Thanks, Marcus. Thanks for the question. No, I don't think there's any major change in the competition landscape. As you're well aware, we are the largest manufacturer and supplier of trays as well as buckets and ancillary products across the globe. Most of our -- well, all of our competition are localized or operate in restricted jurisdiction. We're the only one with a global footprint like we have. We're not seeing any major changes. There are competition across the globe where we operate. And in South America, as you've mentioned, there are quite a few competitors that compete against Austin. The great thing about Austin, we've got a brilliant brand name. And that's why the major OEM that we work for, and yes, it's been a challenge, but we will get that right, has knocked on our door, not on our competitor's door because of the brand name and the quality of product we deliver.

Your first question from the webcast today comes from [ Patrick Moore ]. Patrick asks, why the large increase in subcontractor expenses? And will they continue at this level into 2026 and yet this has not materially reduced employment expenses?

Yes. Okay. [ Patrick ], thanks for the question. The main reason why our subcontractor expenses has been elevated in FY '25 was twofold. The one is when we actually subcontract product into Canada, and that's obviously a subcontractor expense. So our subcontractor expenses has increased as a consequence of our revenue increasing. Remember, our revenue went up 22%. And we pivoted into Canada to circumvent or to ensure we didn't get hit by tariffs. So that's number one. Number two, why subcontractor expenses have gone up is because of Chile, when we actually had this big influx of orders and the orders went from 1 to 10 trays a month, which we struggled to deliver on. That -- we used a lot of subcontractors in that space. So that has moderated backwards. But to answer your question, is it going to go on into 2026, our subcontractor expense in FY '26 should be significantly less than FY '25. But we will still have subcontractors as we grow the business and use subcontractors in regions we want to grow into.

Your next question from the webcast comes from [ Reese van der Maiden ]. [ Reese ] asks, what does the large loss-making Chilean order finish? And what have you learned from this contract? Also by asking them to change the terms of the contract, do you think this will harm you getting extra business with them or other companies in the future?

Yes. Thanks, [ Reese ]. So we've got an overarching agreement with this OEM spanning multiple years. I want to make it clear that there is a termination for convenience on both parties if we wanted to move on. So the fact is that the contract has been challenging for us as it's a new product. We're a subcontractor to the OEM. It's their design. And that has created challenges for us in Chile. We have since then worked very hard on trying to get our operations rightsized for that product. We've also moved some product over to Batam. And both of those will make us get to a better financial outcome for this contract. Simultaneously, we are also engaging with the OEM, and they are very reasonable working with us and want to continue to work with us. There is no -- they have given us no indication that they would like to stop the arrangement. In fact, they would like us to do more work for them. And those discussions are ongoing right now.

Your next webcast question comes from [ Michael Byrn ]. [ Michael ] asks, can you provide an idea of sustainable working capital requirements, for example, in terms of metrics such as working capital to sales or any other appropriate measure?

Yes. So we don't have a specific target range as such. And let me explain why that is. Our working capital will go through peaks and troughs at any even given time. We buy steel on bulk, which we then consume over a period. That gives us leverage with the steel mills and also reduces our cost base. However, that then will spike our working capital as we buy that steel. We also then have -- sorry, we also then have obviously accounts receivable that will spike depending on the order intake. However, that said, if you look at our current working capital, it's definitely elevated. And we are -- we will moderate that back. We've learned a few lessons from buying bulk steel. And we got it slightly wrong for our Chile operations, and we've learned from that. And that, well, gives me confidence that going forward, our working capital will moderate backwards.