Austin Engineering Limited (ANG) Earnings Call Transcript & Summary

Hello, everyone, and welcome to a briefing on Austin Engineering's acquisition of Mainetec. [Operator Instructions] As a reminder, this conference is being recorded. On today's call, we have Austin Engineering CEO and Managing Director, David Singleton; as well as Brett Hampson, Founder and MD of Mainetec. I'll now hand over to David Singleton. Please go ahead.

Hi. Good morning to everybody. It's David Singleton here. And I'm sat here with Brett Hampson, who is the Founder and MD of Mainetec. The purpose of today is just to give you a little bit more color on the announcement this morning. I'd like to thank you all for ringing in. I know this is a very congested period in terms of market announcements. So for you to take the time to call in, it's very much appreciated, and it gives us the chance just to explain things to you in a little bit more detail. I've got 5 or 6 points I would like to go through this morning. I'd like to just quick overview of the strategy of the business and why Mainetec fits well into that. Secondly, just talk to you tactically about what the benefits of this are from a market point of view. I'll talk about synergies and how we deliver those synergies in the business. I'll also talk a little bit about the deal structure as well. So [ I plan to do that ], and then there'll be a time for some conversation at the end, Q&A at the end. So just let me open up by saying that Brett, with his partners, founded this business about 15 years ago in Mackay, in Queensland. And the business was initially focused on the maintenance and rebuild of mining buckets from that region. That gave them a unique insight into how buckets were performing, how they were wearing and how they were getting damaged in use. And over a period of time, they started to use that information as a way of improving the design of buckets so that they performed more effectively in the field. And that led to them designing their first bucket for operational use, which is the Hulk Bucket, which you can see on their website. And then afterwards, went into further developments, including the Armadillo bucket, which is a bucket for the rope shovel dipper market. And that -- those markets and those buckets are very complementary to what we do. I'll also say that when we started this process with Mainetec many months ago, one of the drivers for it was that one of our key customers contacted us and indicated that they'd like to see Austin and Mainetec work more closely together in some way because they value very highly the innovative entrepreneurship of Mainetec and the quality of the products that they were delivering and what it was doing to their operations. But they were a great supporter also of Austin and its ability to support their operations. And they saw that it was a very key link. So that was kind of a key first driver to get this process underway. So just like to just think quickly about the strategy of the business. As I've said to many of you in the past, we are, Austin is the world leader in customized truck trays around the world. So these are truck trays, which are specifically designed for mine site conditions, different ore types and different operational requirements that are required. And the impact of those truck tray designs on the efficiency of the mine site can be quite dramatic kind of all proportion to the cost of the tray itself. In addition to that, we intend to be the leader in mining buckets. And it's a very complementary part of the market, of course, because it's the mining bucket that loads the tray. We had a big push on mining buckets a year ago, and many of you will know that we were able to increase our market share quite dramatically through FY '23 -- sorry, FY '22. And so this acquisition of Mainetec really takes us along that journey of becoming the market leader in buckets as well. From a tactical point of view, the way this fits together is that the Hulk Bucket range that Mainetec have designed from all of that rebuild and refurbishment knowledge that they have, the whole bucket is essentially a premium high-performance bucket that's used in some of the most demanding applications around us, including, of course, in the iron ore industry, in lithium, those kind of very high-performance markets. And they are buckets, which have been tested by many of the majors and are being used increasingly by the majors in those very premium applications. The second area that Mainetec have carved themselves out a very strong position in is in the dipper bucket market. Now for those of you who are not familiar with dipper bucket, these are essentially the largest buckets on the market, are used in coal fields, in oil sands and other applications around the world. These are -- just to give you -- these buckets, the cost of these buckets, [ when new ], are $1.5 million to $2.5 million apiece [ and all up ] to the significant acquisition. There are 31 of those in Australia, and Mainetec have got their upgrade systems on 26 out of 31 of those buckets. And if you consider that Australia is the most sophisticated market for mining in the world, the fact that they have broken into that market is of huge significance. What's interesting to us and is a primary focus for us is that the dipper market, the dipper bucket market, in South America, where we have our operations in Chile and in North America, where we have our operations, that market is about 10x the size of Australia in terms of the number of buckets used. So there's a different kind of philosophy that drives that. So the opportunity for us to offer these customized non-OEM bucket systems and complete buckets is a real opportunity over there. The other thing is that from a tactical point of view, you will see that we will operate Mainetec as a separate business unit. And that's to make sure that all the things that have made Mainetec great up until this point, all the things that have driven the 26% per annum growth rates that we've seen in this business over the last few years, the entrepreneurship and innovation doesn't change and continues through that period of time. And the 3 founders of this business are very committed to the future of Mainetec and its position inside Austin. So I'm just going to go now to synergies, and these are obviously an important part of the acquisition metric. The [indiscernible] for this business really fall into 2 categories, one is about cost reduction, and the other one is about market enhancement. Now from a purely financial point of view, I have only included a conservative estimate of the cost reduction synergies in the accretion levels that were in the announcement. So the 20% plus FY '23 accretion includes only a proportion of cost reduction synergies, not market improvement synergies. And the reason that I've done those is that cost reduction synergies are obviously straightforward to understand and clear to implement. And so we still have the market synergies as a potential upside. Those cost down synergies fall into 3 categories. One is the reduction in overhead duplication. And you know that this business a year ago went through a major overhead reduction program that we implemented very quickly and have been very successful. And so where there is duplication between the businesses, and they are all [ BS1s ] like insurance and banking and certain support areas, we will be able to reduce the overhead cost of the Mainetec business. The second area for cost reduction is our ability to use steel that has been sourced by Austin Engineering direct from mills, steel mills around the world rather than buying from stockists. Our -- the reason that we're able to do that is because we're a much bigger business, and we buy a lot of steel every year. We are able to get much cheaper steel from the mills than you can just buying it from stockists. And that ratio can be easily 2 to 1. And then we buy steel for half the price -- process mill for half the price we can get from steel stockists. So that's a major synergy for us to deliver. And we have already taken steps to deliver that. So that cost reduction should start to come through very, very quickly. The third element of cost reduction is our ability to use our facilities in Batam in Indonesia where, as you know, we've been reducing our cost base and our access to labor through getting subassemblies and parts built in the time and then incorporated into our operations overseas, particularly here in Australia. And that's something we'll be able to do for the Mainetec business as well. And that will reduce the labor cost in that business as well. So that -- those cost reductions are all straightforward type reductions and things that we are -- have already been doing inside the Austin business. So nothing kind of revolutionary in terms of our application of those. As I said, there are market enhancement synergies as well about selling dipper buckets overseas and our ability to broaden the market for Hulk buckets overseas as well as here in Australia. But they are not, as I said, synergies that we've counted in our cost base. Just to remind you of the deal dynamics, and I did see 1 or 2 comments, which suggest that there's a little bit of confusion maybe in 1 or 2 people. The acquisition price for this business, including debt of about $1.5 million, the acquisition price is $19.6 million, of which $11.5 million will be paid from a new term loan facility from HSBC, which is credit approved, and we're just going through the final documentation of that loan, and we expect that payment to be made sometime in the next 45 days. There is a -- so that's $11.5 million of the acquisition price, with a further $3.5 million, which gets paid in cash in 1 year's time. And then a further $3.5 million, which gets paid a year after that, i.e., in 2 years' time. So it's a staged payment of $19.6 million over the next 2 years. In addition to that, we have put in place for the 3 founders of this business, Brett Hampson, Stephen Mounsey and Dave Sanderson, we put in place a $6 million incentive plan. Now this is fundamentally a self-funded plan in that the targets that we have identified are over and above the targets that we have used in the acquisition metrics and in the accretive analysis that has been carried out. And those targets over the next 3 years are based on revenue enhancement above the targets that have already been set for the business. They include delivery of the market synergies that we've talked about but not valued previously for dippers, and that would be typically overseas in North America and South America. And a third element, which we're not disclosing because of commercial confidentiality around that, in that we see this as a market-leading step, and it's something I'll be able to talk to you about later, but there are very clear targets around all 3 of those incentive targets. The $6 million is payable at the end of the 3-year period in stock in Austin priced at the -- at the 30-day VWAP at the end of the 3-year period of the incentive plan. Finally, before I hand it over to you for questions, I just want to thank the advisers that were involved. And I did miss a couple of advisers off the announcement that I did this morning. And I believe [indiscernible] just for Mainetec, so I will correct that miss. Of course, I'd like to thank UBS in Perth who have been part of this deal from the get-go and the great work that they have done. The advisers for Mainetec out of Sydney were LCC, and I did miss those off the announcement this morning, but I'd just like to call them now. Mainetec were represented legally by Johnson Winter -- sorry, by Squire Patton Boggs out of Sydney. They were the Mainetec lawyers. And the lawyers to Austin were Johnson Winter & Slattery out of Perth. So that's me complete. I'd like to hand it back to the operator now for any Q&A. And as I say, Brett Hampson's in the room. If you'd like to address any questions to him, feel free to do so.

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

David, can you hear me?

Jim, yes, we can hear you.

[indiscernible] to the acquisition, two questions. Firstly, in terms of the buckets you're acquiring. Can you give us just a sort of rough breakdown of the commodity exposures and also what you could potentially -- is it effectively applicable to all your commodity set or only to certain commodities specific to?

Yes. So I can give you a couple of comments there on commodity exposure, Jim. The Mainetec business started out in Queensland. So a lot of that exposure initially was to coal. The analysis that we've done is less than 3% of their current exposure is to steaming coal and the rest of it to -- well, not the rest of it, but the rest of the coal exposure is to metallurgical coal. So quite a small exposure to steaming coal. These days, a lot of their expansion is here on the West Coast, and that's into iron ore and other hard rock commodities.

Great. And just one on -- sorry.

No. Go, ahead, Jim.

Were you going to say something?

No, no.

Okay. Sorry. And the last one was just a quick one on just the financial terms here. You mentioned there that you've got economic exposure from the 19th of August. I just want to clarify that's not just for -- is that essentially the acquisition is going to finalize in late September, but you're effectively going to start benefiting from mid-August, i.e., a couple of days ago.

Yes, that's right. So financial control from Friday, even though we won't complete for another 3 or 4 weeks.

Your next question comes from Trent Barnett from Euroz.

David, great acquisition. Look, I assume it's a pretty capital-light business. Just for my model, sort of what sort of D&A is in there? And is there sort of any -- what sort of CapEx do you think this business had?

Yes. Thanks for the question, Trent. It's a good question. The business is very similar in many ways to the Austin business. I mean, it's a pretty capital-light business. The nature of the facilities and the equipment that we need are relatively standard, and therefore, that didn't drive any big capital expenditure. And of course, some of the things that they would like to get access to, we already have inside the Austin business. So that will cut their capital expenditure [ any more ]. We haven't finalized on D&A. But I believe it will be circa $0.4 million per annum for the Mainetec business.

[Operator Instructions] Your next question comes from Tony Mitchell from Ord Minnett.

Congratulations, David. Very good acquisition. Can you just fill us in, in terms of the bigger bucket market in America, for example, who are the major players in that market?