Emeco Holdings Limited (EHL) Earnings Call Transcript

Good day, and thank you for standing by, and welcome to the Emeco Holdings FY '21 Full Year Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I'll now hand the conference over to your first speaker today, Mr. Ian Testrow, Managing Director and CEO for Emeco Holdings. Thank you. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for dialing in to our FY '21 results briefing. With me today I have Neil Siford, our CFO; Thao Pham, Chief Strategy Officer; Steve Versteegen, the CEO of Pit N Portal; Andrew Taylor, our Financial Control; and Sam Byford, our Manager of Investor Relations. We'll start off by turning to Slide #1. I'd like to thank the Emeco team for another year of hard work, particularly in the challenging and uncertain circumstances. I'm very proud of the efforts that the team has made in FY '21. It's been a busy year where we have successfully managed through the volatility and seen the benefits of our diversification strategy reflected in our results. FY '21 was the year that we delivered solid financial results and excellent cash flow; restructured all of our legacy U.S. debt, for which we thank our supportive shareholders and welcome our new Aussie dollar note holders; and announced and delivered on our capital management policy. And it was a year where we continued to develop and deliver on our strategic goals, which I'll talk about throughout this presentation. On Slide #2. We are incredibly proud that with our workforce of over 1,100 people, our recordable injury rate has reduced to 2.1, down from 2.9 last year. As we continued to target zero harm across Emeco, it is great to see that we also remained lost time injury-free throughout FY '21. Operating EBITDA was $238 million, and that was at the upper end of the guidance we provided in April. This reflects the stabilized performance in the Eastern region, continued excellent growth in the West and a good contribution from Pit N Portal, albeit somewhat impacted by some operational challenges that are now resolved. Strong free cash flow of $87 million is an excellent result, funding growth and capital management. Our return on capital dipped due to the impact of lower earnings and higher capital following the Pit N Portal acquisition, but this will increase into FY '22 onwards as earnings growth. The refinance of our legacy U.S. notes in June was a real milestone for us. Great support from investors at a significantly improved rate and extended maturity. This by -- have simplified our capital structure and lowers our cost of capital, and I think it validates the work we've been doing to build a resilient and diverse business. The cumulative benefit of our debt restructure in FY '21 means that in FY '22, our interest expense would be down 64% on FY '20, a saving of $28 million per annum. We also continued to diversify our commodity exposure, with gold and base metals revenue now at 62% of group revenue, up from 42% in FY '20. Gold is now our largest commodity exposure. Services-related revenue has also continued to grow, now at 72%, up from 62% in FY '20, which, as you know, is a key strategic objective as we widen the value proposition to our customers. The Board has announced an inaugural capital management package of 35% of second half operating NPAT. This is made up of a $0.0125 fully franked dividend and a modest on-market buyback of around $4 million. And to our group outlook. We expect growth in all of our operating segments in FY '22 and are comfortable with current consensus of FY '22 operating EBITDA, which is around $262 million. We see continued strong growth in the Western region and improving the contribution from the East as the business has stabilized and we pursue projects to put our current idle equipment to work. We're looking for longer-term sustainable projects, which continue to diversify our commodity base. Pit N Portal will also deliver strong growth as new projects commence in the first half with earnings expected to be weighted to the second half as these new projects and existing projects move from development to -- through to production phase. Our net sustaining CapEx is expected to be in the range of $140 million to $150 million. This includes asset rebuilds of around $115 million to $120 million. You note that we've allocated $25 million to $30 million for asset replacement, which is expected to be around 5% of our fleet value. This ongoing investment ensures that our CapEx profile will remain smooth and predictable with no significant or lumpy CapEx requirements. Obviously, our strong cash flow more than covers this spend. Pit N Portal has won a couple of new projects, which will require an initial $10 million to $15 million in growth CapEx. I think it goes without saying that we generate strong free cash flow, are committed to leverage below 1x and will return capital to our shareholders in line with our recently implemented capital management policy. We're in a position to review opportunities to deploy our surplus capital into investments that meet our strict return hurdles and further our strategic goals. If no such opportunities present, we'll consider holding cash and further strengthening our balance sheet. Moving on to Slide 4. As I mentioned, we've reduced our TRIFR by 25% since December down to 2.1 as of the end of June. Importantly, we remain lost time injury-free for 5 years running. This is a great team effort by a workforce of over 1,100 people as we continue to target a zero-harm work environment. Our COVID-19 systems and process continue to maintain a safe and healthy work environment for our people. This has ensured zero COVID cases and a continuity of our operations. We continue to invest time and money into our safety programs and technology to proactively manage our safety performance. Moving on to Slide #5. Our skilled workforce is our key asset and differentiator. We've been investing a lot of time and resources in their retention and development. You will understand the labor pressures in the mining industry at present, and we continue to support and develop our people in a really positive way. We've invested significantly in Project Align, which we brought out nationally, engaging with over 860 of 1,100 employees. And these 860 employees today have defined and guided our organizational values. Align is targeted at engaging our workforce in the long-term success of Emeco and providing opportunities for our people to develop within the organization, which we know is a key to employee retention. We employed -- sorry, we appointed John Worsfold as a Manager of People and Culture in February, and he chairs our Community Engagement Committee, which allows us to be more involved in our local communities. Our people have identified a number of causes and community groups to support, and we're committed to ongoing involvement with Lifeline and supporting junior sporting organizations. We are also undertaking a detailed sustainability assessment, which will establish our ESG strategy, including long-term goals and targets and a pathway to decarbonization. I look forward to presenting our sustainability targets later in FY '22. I'd like to now hand over to Neil to cover the group's financial performance.

Thanks, Ian, and good morning, everyone. So Slide 7 shows our FY '22 results. So operating revenue of $620 million comprised the full year of Pit N Portal, which contributed $144 million; and rental revenue, which was down 6% on last year to $401 million. There was good growth in services revenue and strong growth in the West; a decline in the East, which Ian will cover further in the segment slides. You should note that our presentation today contains restated figures for -- to reflect the adoption of AASB 16 leases and hence are slightly different from the FY '20 results pack, and that's just to clarify for the prior year results. This allows an accurate financial comparison between years and, as usual, the footnotes have all the details. Operating EBITDA for FY '21 of $238 million is at the upper end of our guidance and reflects strong growth in the West, up 35% to $71 million, offset by the decline in earnings from the East by 24% to $158 million. Pit N Portal contributed $30 million in its first full year in the group. And Force's annual contribution was slightly ahead of last year at $8.1 million. Importantly, group revenue is up 7.4% half-on-half and operating EBITDA is up 2%. Earnings have now troughed, conditions are improving in the East, and there is continued growth in the West. Pit N Portal's earnings were flat half-on-half. But as Ian mentioned earlier, the momentum is building in all divisions. Our group EBITDA margin is 38%, down slightly on the 39% at the half. But importantly, rental margins actually improved half-on-half, up from 56.5% to 57.5%. This was, however, offset by a decline in the half-on-half margin at Pit N Portal as the new projects ramped up in development phase and due to the temporary impact of some early-stage commissioning issues, which, as Ian mentioned earlier, are now resolving. A comparison to FY '20 margins is not reflective of where we have taken the business with our deliberate diversification strategy, which brings broader opportunities, more secure and longer-term customer relationships across commodities and with increased services revenue. Operating EBIT of $119 million reflects the increase in depreciation charges of $4 million for the full year of Pit N Portal and explains a proportional decline in EBIT versus EBITDA. Operating NPAT of $57 million was broadly flat with a benefit of lower interest costs incurred as a result of debt reduction and with both FY '20 and FY '21 tax effected at 30%. Our return on capital at 17% is down on the half year of 18.7% due to the annualized effect of higher capital employed in Pit N Portal and the decline in EBIT, which we mentioned earlier. This, however, remains comfortably above our cost of capital, and we expect this has bottomed, and it will improve as earnings improve in FY '22. I'll now move on to Slide 8, cash flow. Another strong period of cash conversion of 102% with broadly flat working capital for the year. The chart shows the benefit of the lower interest expense following the half 1 debt payment. Our net sustaining CapEx of $116 million was in line with our guidance of around $115 million and resulted in free cash flow before growth CapEx of $87 million. We also invested $40 million in growth assets, predominantly to support further growth in Pit N Portal. It included the package -- the purchase of a package of underground equipment to support its rental operations and ramp-up of projects. This transaction demonstrates the group's ability to quickly source assets that support customer growth, and I am pleased to report that the equipment is being put to use at strong returns. I will now hand back to Ian to touch on the FY '22 CapEx outlook.

Thanks, Neil. As mentioned earlier, we're commencing a staged and smooth investment program into replacing assets over the coming years. On top of our ongoing asset rebuild investment of around $115 million to $120 million, we plan to invest approximately $25 million to $30 million in replacing some core fleet over FY '22. Similar investment in subsequent years is expected as assets reach end of life. This will ensure a smooth and predictable CapEx profile over the coming years that will sustain our fleet and ensure we continue to generate strong returns. As I noted, the annual spend is around 5% of our current fleet value. We believe that we're the best in the industry at sourcing and rebuilding assets to generate strong returns for our shareholders, and this will underpin the replacement program over the coming periods. In terms of growth investment, Pit N Portal has 2 newly awarded projects commencing in the next few months, and this will require an additional $10 million to $15 million in growth CapEx. On to Slide 9 and the balance sheet, and I'll hand back to Neil.

Thanks, Ian. Our balance sheet has strengthened significantly in the year, and that's in no small part due to the support of our shareholders. The refinancing announced in June last year, which -- sorry, June this year, which completed earlier this month, combined with the repayment of U.S. notes in August last year, will result in annual interest costs reducing by $28 million and, as mentioned earlier, a reduction of 64% compared to FY '20. Our debt maturity profile has been extended out to 5 years. Our plant and equipment has increased as we invested in growth assets largely to support Pit N Portal. We have maintained disciplined capital management. Our working capital position is solid. We have low leverage and excellent liquidity with cash on hand and our undrawn revolving credit facility, which is now extended out to FY '24. And I'll now hand back to Ian to discuss the operating segments.

Thank you, Neil. Now on to Slide 9 with the rental division. In FY '21, we took the opportunity to rebalance our fleet across Australia by relocating a substantial amount of fleet from the Eastern region to the Western region. This makes Emeco a healthier business going forward with a more balanced geographical customer and commodity spread. $229 million of operating EBITDA is a solid result given the COVID-related challenges, in particular, with the Eastern region coal in the first half of FY '21. Opportunities in the West created an opportunity to relocate fleet to meet demand. The business delivered revenue and earnings growth half-on-half as operating conditions stabilized in the East and the assets we moved to the West were put to work. As you can see, operating utilization could decline during the year. A decision we made to relocate equipment has seen the utilization return up to 60% in the fourth quarter. We expect growth in rental in FY '22. We'll see the full benefit of assets deployed into the West, and with continued strong demand in the West, we expect to see solid half-on-half growth and full year growth. Despite the transfer of assets to the Western region in FY '21, the Eastern region will grow over FY '22 as we put idle capacity to work, with that growth weighted more to the second half. In all, we expect our rental margins to remain broadly consistent year-on-year as we pursue projects with higher service levels. On to Slide #12. The key message for our Eastern rental operations is that performance has stabilized in the second half. The full utilization in the first half has been made up somewhat in the fourth quarter off the back of new projects in coal and copper. We've effectively transferred $30 million operating earning capacity to the West. We are encouraged by improving coal conditions in the region. However, we've been measured in how we approach the deployment of our idle capacity. We want to make sure that we're smart in the way we put equipment to work. In line with our strategy, we are targeting projects to put idle assets to work in longer tenure, high service projects. We also see opportunities in base metals and gold, which will further diversify our commodity mix. So we expect our growth to be weighted to the second half as we get our equipment to work in our targeted projects. Over to Slide 13. The Western region has had a very strong year, up 34% on FY '20, supported by projects in gold and iron ore. The relocated fleet is now fully deployed to meet demand from numerous project wins. Customer engagement is strong, and we created 3 new EOS projects, which reflects our drive to deliver value beyond dry rental. Operating utilization increased from 55% to 65% half-on-half as we placed more assets into double-shift projects as has been our plan. Continued strong half-on-half and full year growth is expected ahead. This is driven by the full year effect of transferred equipment, continued strong demand for our fleet and increasing services with fully maintained double-shift work. We expect margins to increase as utilization continues to improve. And given good prospects, we may consider additional growth projects should they meet our strict return hurdles. All in all, the West remains a great story for us. Now it's my pleasure to hand over to Steve Versteegen, CEO of Pit N Portal, to talk about the first full year with Emeco on Slide 14.

Thanks, Ian. Good morning, everyone. I'm pleased to talk about what has been a great year for the Pit N Portal business. At the outset, I want to say that the team and I have been very fortunate to have the support of Ian and the Emeco team to support our growth to collaborate and to benefit from the strength of the group. There's been great synergies, and it's excellent working together. Numbers reflect the commencement of the Mincor project to good activity levels in the underground sector as well as strong demand for our underground rental fleet. Pleasingly, we secured our first mining -- surface mining projects supported by Emeco Rental and the EOS technology. We've also mobilized and started our second surface project just this month, which will again utilize EOS and Emeco's equipment and maintenance capabilities. As we announced in April, we had some project commissioning issues. This temporarily impacted our profitability but is now on track. The half-on-half revenue is up strongly, up nearly 50% to $85 million versus the first half of $58 million. Operating EBITDA was flat at $15 million, which reflects the impact of the issues I just referred to and also the fact that margins in the development phase of new projects are typically lower and build as the projects move into production. We invested in growth assets with the recently announced package of underground equipment, which is in strong demand and brought forth availability of equipment models, which currently have long lead time from the OEMs. It's also opened up several new customer opportunities. In addition to our existing projects, we also commenced newly awarded project wins in Queensland and WA in the first half of FY '22. Looking into FY '22, we see strong growth as our existing and new projects ramp up. As these projects progress from development to production, margins and earnings will increase. You will see evidence of these in the second half of FY '22 with full benefit coming through in FY '23. Lastly, a word on the labor market, which is topical. This has been a challenge due to COVID and tight border restrictions. However, we acquired an underground labor hire business last year called Bowden Select, which has significantly assisted in recruitment of underground operators to facilitate our growth. Also, the group's Project Align and John Worsfold have both supported the employee engagement and retention to mitigate some of the labor tightness we have experienced. The labor situation remains tough, but we believe the increased recruitment capability, Project Align initiatives have placed us in a better position than many of our competitors as we proactively managed through this. We've also gained some traction on the East Coast, and we'll be targeting more projects in the region as we leverage Emeco's East Coast footprint infrastructure networks to continue to pursue both open cut and underground opportunities. Crucially, the labor tightness is not as much of a concern in the East. Thanks. Back to the management team.

Thanks, Steve. On to Slide 15 and now Force workshops. We saw continued growth in earnings in FY '21, supported by good external customer revenue and expanded margins. Our internal rebuild activity was down with -- sorry, our internal rebound activity was down with lower Eastern region utilization, but this will rebound in FY '22 as utilization recovers. Force has increased proportion of Emeco's components it rebuilds for Emeco by 15% over the last year. Force continues to be a key differentiator and competitive advantage. Our ability to rebuild equipment provides a cost and quality advantage compared to our competitors. This business provides security supplied to our large fleet and ensures we get great value from every dollar of capital invested. Force has been a driver of achieving historically higher return on capital sustainably over the past several years on an ongoing basis. Our workshops provide Emeco and Pit N Portal businesses high-quality fleet with a cost advantage. Force will play a key role in our fleet replacement program as we acquire mid-life assets and rebuild them in the workshops. This ensures our smooth capital profile in the coming years. Force recently entered into an agreement to acquire a small WA's line boring business called Borex. This is a vertical expansion of capability and boosts our specialized engineering, line boring and machining services as well as light-to-medium fabrication. This year, we expect growth in external work, particularly in the East as well as an increase in underground maintenance work for Pit N Portal. I've included Slide 17 to reiterate our strategy, which you should all be familiar with. I'll just skim over that and go to Slide 18. I'm really proud that as we've navigated through an eventful year in the business, we made great progress on executing on our strategic plan. We've covered our balance sheet in some detail, and our healthy balance sheet and capital structure supports our ongoing growth. We continue to be disciplined in capital allocation and ensure we maintain our strong balance sheet. The lowest cost and highest quality focus is in the core of the Emeco business. It's in our DNA. This is our key strategic advantage and differentiates us from our competitors. We strive every day to deliver this to our customers. We continue to widen the value proposition with nearly fully maintained rental wins, increasing the implementation of EOS with 3 new EOS projects and work with Pit N Portal to win new long-tenured projects. And we continue to diversify our business through asset redeployments, new project wins and greater geographic and commodity spread. Finally, to wrap up on Slide 19. We'll focus on the -- on our initiatives and areas of focus for the coming year. We still have idle equipment, which we'll put to work, targeting strategically on Align Project and customers, further diversifying our commodity mix and exposure in the East. We'll create more EOS, fully maintained double-shift projects in the West and support the growth of Pit N Portal as they progress projects from development to production phase and continue to win more work. We'll continue to leverage the capability of Force in providing our customers a retail maintenance solution and to provide us with quality and the cost advantage to our Emeco and Pit N Portal operations. And we'll commence our fleet replacement program with modest and disciplined CapEx using the expertise of Force. Our strategy to build long-term sustainable shareholder value will be supported by the strong cash flows we generate going forward. We're guided by our capital management policy and committing to keeping leverage below 1x EBITDA. With our surplus capital, we'll continue to review opportunities and deploy into investments either organically or through M&A. All investments will meet our strict return hurdles and target accelerating our strategic goals of widening our value proposition to embed ourselves onto our customer projects and to diversify our business and commodity mix. Our growth strategy is to build long-term sustainable value for our shareholders. If no such opportunities present, we will consider holding the cash to further strengthen our balance sheet. Thank you. Moderator, can you please open up the call for Q&A?

[Operator Instructions] Your first question today comes from the line of Jakob Cakarnis of Jarden.

I just wanted to ask a question just on Eastern rental utilization, just to start. So you mentioned that, that was up to 60% in the fourth quarter of '21. Do you think that that's the right rate of utilization to extrapolate into FY '22? And then the second part of that question, can you just let us know the utilization got to at the peak of last cycle, if it's comparable?

Thanks, Jakob. Yes, first, on the Eastern region, so 60% utilization. I would continue that through the first half. I think that would be a good assumption. And then I would have that utilization building into the second half. Our peak utilization was around high-60s in the Eastern region -- yes, in the Eastern region, and I think we'll build back towards that into FY '23. So in summary, 60% in the first half, building towards mid-60s into the second half and then to high-60s in FY '23 [indiscernible] in the Eastern region.

And then just pivoting to the West Coast, it looks like a good result there, especially to the second half. Can you just talk to some of the competitive dynamics in that market and whether or not there's further upside to utilization as you guys ramp up double shift there, please?

Yes, happy to. We're feeling really good about the Western region business. Our team has done a fantastic job in creating fully maintained projects. And I think that combination of our skilled workforce and our EOS technology really differentiates us in the market. So I feel very, very good about building both the utilization in the Western region and our margins going forward. I also feel good about the Pit N Portal business's ability to win further open pit operations. We commenced a second open pit project with Pit N Portal in August, another EOS project. And I think the combination of the work that our Emeco team is doing plus Pit N Portal's capability will certainly assist us in our objective of building more fully maintained double-shift projects in the West supported by EOS.

Also, one final one for me. Just a focus on free cash generation and the capital management mix that you've announced today. Am I right in thinking moving forward, it's going to be much more weighted to an ordinary dividend payment rather than including on-market buybacks? Or is there any additional light you can shed on that, please?

Yes. Look, it's obviously a Board decision, and the Board will carefully consider the capital allocation on a half-by-half basis. I'm really proud of Emeco. And this is our first capital allocation since 2013. So it's a real milestone for us on top of our refinance. We -- as you know, we announced a capital allocation of 25% to 40% of operating NPAT. So for the Board to allocate 35% really is at the top end of that range and shows the confidence that they have in the business and our cash generation going forward.

And your next question today comes from the line of Trent Barnett from Euroz.

You probably sort of answered the question already. I'm just wondering, it sounds like every division has got a much stronger second half. Just wondering on a group basis, sort of what sort of split we're expecting for the second half?

So this is -- you're talking of FY '20?

FY '22. So we sort of got the guidance in line with consensus, which is fine. Just when we got every division going to be much stronger in the second half, is that sort of like a 55-45 split second half or maybe stronger in the second half?

Trent, I might just give you a high-level overview into [indiscernible]. But from an operating perspective, I think you consider Force's consistent half-on-half; the Western region to be fairly consistent half-on-half on growth; the Eastern region, I think you should consider growth to be weighted to the second half; and Pit N Portal business, as we get through the development phase and get those projects into the production phase, will be weighted to the second half. Over to you, Sam.

Yes. Ian, it's pretty much what I was going to say. But I guess, strong growth in the West this first half. We expect growth in Pit N Portal first half and second half, probably heavy weighted to the second half and then a small second half weighted. But at a group level, if you would go half on half on half, we'd expect pretty constant growth rates across the board to get up to that consensus guidance number we would look to.

And your next question today comes from the line of Mitch Sonogan from Macquarie.