Babylon Pump & Power Limited (BPP) Earnings Call Transcript & Summary

Well, good morning, everyone, and thanks for joining us today. Welcome to the Babylon Pump & Power Half Year Results Investor Conference Call. We've got all of our attendees in listen-only at this time. On the call today, we've got Babylon Pump & Power Managing Director and CEO, Michael Shelby. I'll pass you across in a moment to Michael to kick off our discussion of the company's half year results. We'll have a presentation from Michael today, followed by an opportunity for Q&A with our investors on the call. [Operator Instructions] So to kick things off, I'll hand over now to Babylon Pump & Power MD and CEO, Michael Shelby. Go ahead, Michael.

Thanks, Tim. Good morning, everyone. What my plan today was to click through the slides as previously released to the market and be able to elaborate a bit on what we've shown and then happy to take questions for further details as required. Standard disclaimer. Some of you may be new to the Babylon story. So just a quick introduction of who we are. Babylon is based in Western Australia, and our business model specializes in water management, equipment and services, meaning unique rental offerings for water management, dewatering, water disposal and then power to power those critical infrastructure needs with pumping water and managing water. And then also, we have a maintenance segment, which specializes in rebuilding large engines for mining clients. We have workshops in Mackay, workshops in Perth, and we have one facility up in Newman, and then we have a branch down in the south of Perth covering our clients down there in Boddington. To get straight into it, very proud to show the results of our first 6 months of the year. This is, a lot of hard work has gone into achieving these results over the past 12 to 18 months, now coming to fruition. We feel like we've turned a little bit of a corner in the company as we've matured and grown through the years. Customer demand remains strong. Our revenue is up 64% from the previous half year or previous first half of 2023. But more importantly, what we're happy to report now is the increase in EBITDA over 350% and then also now declaring a net profit for the 6 months, which is a milestone for the company as we've grown and matured. We're seeing strong operational cash flow in the first 6 months of the year. So these are the key metrics that we, as a management team, review and monitor on a weekly basis, and we're very happy and very proud to have these results come from the hard work that's been put in over the past, like I said, 12 to 18 months. A bit more detail on our P&L and balance sheet. Main thing I want to point out on this slide is our -- on our balance sheet, our deferred consideration is coming down, and we have a plan in place that we're executing to have all of our deferred consideration fully paid off by the end of this financial year. You'll see it's at the midyear, it stood at about [ $1.2 million ]. So that's roughly -- well, that is $200,000 per month that we're paying off in that deferred consideration that we have been paying off as well. And what's key there is once that deferred consideration is paid off at the end of this financial year, that's roughly $200,000 of free cash that comes back to the business for us to use for growth strategies, whether it be working capital to use within the maintenance segment as that segment is performing very well or adding new assets and capabilities to our rental segment. So that's very key for us to have that opportunity going forward where we see a light at in the tunnels plus some free cash for the business. And then also, I wanted to highlight our borrowings. Our borrowings are predominantly all based with NAB. And the weighted average of interest rate right now that we're seeing is 5%, which is very manageable. We do have capacity within our finance facilities, first to draw down money as required right now. And then off the back of our good half year results, we are working with our bankers to try to potentially increase our asset financing facilities as well. We'd like to have the ability to buy more assets for the rental division with this facility. So those are key items for growth and key areas that we're concentrating on from a corporate finance point of view to pay down and really improve our balance sheet. And I'd be remiss if I didn't highlight again the results of increased EBITDA and NPAT as well for the first 6 months of the year on that P&L. Delivered improved performance across the business, again, strong EBITDA growth, strong NPAT growth. We've successfully introduced new assets into our rental segment, meaning stand-alone hybrid power systems and then also passive evaporation technology. I'll get into a bit more detail on those items a little bit later on, but the key areas for us is we want to grow our water management capability in the rental space. And those items are key to differentiate us from other companies. And then also as a note, the test pumping part of our business, which is the very early stages of mine water management, we've had great results this past 6 months as well, completing projects in the Northern Territory and in WA. And we're also seeing great customer demand going through to finish this financial year, and we are discussing some significant projects for next financial year with our test pumping crews. The rental segment EBITDA is growing at a higher rate than the revenue growth, which is great. We're seeing customer demand, but we're also performing more profitably as we grow our fleet. And the maintenance segment is where some key initiatives over the past 12 to 18 months have really begun to deliver for us. And we delivered 267% EBITDA growth over the first half of 2023. And that's a testament to the people we have, the management that's now in place and a simplified streamlined structure that's delivering on recurring projects for clients. As I mentioned previously, deferred consideration should free up about $200,000 per month of cash flow, and we're also working with our bank to improve our finance facilities to enable rental growth. So all these work in conjunction and good results breed good opportunities for us to grow even more. Specific to the rental segment, rental segment continues to grow. Revenues up 57%, EBITDA up 64%. We have organic growth within the segment. We try to build our asset base efficiently. We are able to assemble and build unique assets, large pumps in-house. We have the technical know-how to do that. And then we choose to try to go spend our financing facilities on the unique stuff that we might not build in-house like the stand-alone hybrid systems and the sprayer-less evaporation. Those are a bit more technological advanced. We have great relationships with our suppliers there to be able to purchase those. But then in-house, [ we really don't want to do it the most efficient way we can, ] and that allows us to put our decades of experience of our workshop guys to work to truly have the best product out there for dewatering. Our rental growth has been predominantly in the gold and iron ore sectors. We do have some exposure to the nickel market. Our exposure is specifically with BHP and Mount Keith, one of their mine sites. Now with that, we feel like BHP is a great counterparty client to have. Mount Keith is a very strong and blue-chip asset for them in the nickel market. So we're very happy with the exposure that we have. It's not a material amount to the company, but the exposure that we do have is with the quality, client and quality asset of theirs. Again, as I mentioned, we try to grow our pumping rental fleet by in-house builds. We can do things more efficiently, and I feel like we can do things better that way. And then our key growth areas for the rental segment, we're looking to buy bulk assets. We're looking to build assets, and we're looking for potential acquisitions in the rental area. There's nothing that's going to happen in the immediate future, but we do always have a net cash out for those type of opportunities. Maintenance segment, revenue up 67%, EBITDA up 267%, tremendous performance on that side of the business, strong customer demand. We're now seeing, as the company evolves and matures, recurring works with large clients. Whereas in the past, we might not have been dealing with the -- always the top-tier type clients. But as we have matured and delivered, we are now dealing with the big boys, the big miners, the end users, such as the BHPs and the Rios, but also the top-tier service companies. And having those recurring works with a great counterparty there allows us to do more efficient work and allows us to have better visibility and better planning to be able to have a better result for everybody. Our revenue growth and profitability growth has been seen in both the Perth workshop and the Mackay workshop. So both areas of the business have grown and have delivered higher profits, which is, again, a testament to the guys who run in those areas. And by having a stable, flat structure, we're truly able to see the improved performance trickle down to the bottom line. Some specifics about the unique products that we have on offering. In the past month or so, we've mobilized sprayer-less evaporation up to the Pilbara. Now this specific client has too much water. They need to get rid of water, and they were in a bit of an emergency situation to deploy some answers and try to get some traction in reducing their pond levels. And we're able to respond quickly with a rental option of these sprayer-less evaporators. And the key area that these are an improvement over other competitive products in the market is they require less power. Traditionally, evaporators spray water into the air and it requires more water -- I mean, more power to pump that water and then to spray the water into the air, whereas we don't spray the water into the air. We blow water over the top of the air, disrupting the boundary layer and improving evaporation in that manner. So instead of using a 45-kilowatt motor or larger per evaporator, we're using a 5-kilowatt motor. So it's a significant savings in electricity required. So therefore, the power requirements, whether you're using diesel generators or main power or whatnot, it reduces the requirement there, reducing their carbon output. Also because they are not a traditional method of evaporation where you have a lot of moving water, you have lower maintenance because you don't have clogged nozzles, you're not going out to over the water in dangerous situations to try to fix and maintain these. These are simply a specialized fan adjusted to sit and float on top of the water and disrupt that boundary layer. We feel like it's a unique offering. It's a different offering, and it will set us apart going forward, something that especially the large top-tier clients like this one, who are looking to try to reduce their carbon output, these type things in these key areas, they're not a massive material amount of production for a miner when you look at their overall emissions, but this really is a step in the -- a step up the pathway for them to do what's right and making this available to them. It seems to be very easy for them to take up as an alternative and do the right thing. Stand-alone hybrid power systems. These are redeployable, fairly quick and easy to set up and move around as required. This installation is more of a semi-permanent type installation powering a small pump. But these are designed to go in, be put on the ground and replace small diesel generators. They're manufactured in WA to tough conditions. And what we've seen is a great performance at the current mine site where this unit is operating and a reduction in both diesel burn, so therefore, direct carbon output has reduced and then reduction in manpower required because these operate mainly from solar, mainly from battery. You have a little bit of diesel generator kick in every once in a while to charge the batteries depending on the conditions and the sunlight and whatnot. So you're not refueling, you're not maintaining a genset and you're monitoring these from a far without putting people in harm's way by going into an active mine area or going into an area where they might be transferring diesel, that sort of stuff. So overall, we see a win from the environmental standpoint. We see a win from the safety standpoint. And then operationally, it's just easier once clients have these installed, it's easier for them to maintain these in the long run and let them run consistently rather than a traditional diesel method. Again, this is something that we're working with multiple suppliers across Australia to be able to fit key power requirements from the kind of a 20 kVA up to 100 kVA spectrum for powering, whether it be pumps or workshops on site. And we feel like that over time, there's been some lessons learned. There's been some improvements. We have great experience on mine sites with this type of work, and our suppliers have great experience building this type of gear. So putting our heads together just over the course of a few months of having a unit in place, we've been able to work with our suppliers to make improvements on the units going forward. Group outlook. Going forward, we feel like those unique rental offerings will continue to grow the customer base and the rental side of the business. We also feel like growing our asset base will grow the rental. We're improving our balance sheet, and we're offering critical services but in an innovative way. We're having great client uptake. There's been great client demand for all of our services. That doesn't seem to stop. And I think as we mature and as we get our name out there by offering these unique opportunities, we're seeing more and more people actually come to us and bang on the door and saying, "Hey, what can you do to help us?" So it's a great position to be in from a small company years ago, growing, trying to get our foot in the door now to where we feel like we've turned the corner from both the profitability and then also an operational maturity. I don't see demand letting up anytime soon. We're anticipating -- without giving any guidance, we feel like the first half of the year is a great step. We feel like that there's no reason why we could not -- should not continue to deliver in this manner going forward. Corporate snapshot. I guess, highlight here, a very stable shareholder base. Our top 20 hold about just under 50% of our shares, and we have a few key people who have been with us in the long haul that we're very happy to have on board and I feel like they've been very supportive over the years. Just kind of a standard slide there. I just want to show who we are and a bit of background, everybody. For myself, this company has evolved. Again, years ago, there was a Board of 3, and we've been able to attract good talent at the Board level to assist me, to allow me to focus on growing the business and be able to support the company in all aspects. So it is a testament to this group and their support to us as well to, I guess, free me up, let me focus on the business and grow and the results are coming through. And that's it for me coming to the slides. So happy to take questions and elaborate as required.

Thanks, Michael, and well done again on the half year results. [Operator Instructions] So we've had our first couple of questions come through, Michael. So if we dive straight in, are you able to give us a sense of the competitive landscape in the markets that you operate in and how you win business across the different markets?

Okay. Two distinct market segments that we operate in, the maintenance segment where we rebuild large engines for clients. The main competition there are the OEMs. It's the Caterpillar dealers, and it's Cummins and Komatsu. So for us, we are -- there's such a large installed base of equipment in Australia. Quite frankly, we can make a good living and we can continue to grow that segment as required. We could double it, we can triple it because there's so many machines working in Australia. Now the competitive advantage that we have instead of going to a Caterpillar dealer is generally for us, the capacity and the speed. So let's say, a large international or multinational type miner that might be the headline of a newspaper, they'll have an agreement with a WesTrac or someone like that to rebuild their engines. But there's always those moments where it's stuff happens and you have a machine down or you have stuff that's outside your normal process of rebuilding. And so that's where we're able to step in. We provide a quality product. Our products have been provided to all the big guys, to the Rios, the BHPs, to FMGs, those type guys. But in a timely manner because the big beasts tend to try to operate in that manner and try to have such well planned. We're able to go through on the small side and provide those engines. So from a speed point of view and overflow point of view, that's where we're able to really make inroads there in the maintenance segment. On the rental side, we're not a traditional rental company like a [indiscernible] or those guys. We specialize in large complex water management issues. So from a competitive point of view, we have gear that we rent that other companies just don't have, whether it be large 1,000 horsepower-type pumps that are moving high volumes and high head. Those type items, you're not going to find at your local pump rental branch around the corner. So that, coupled with our decades of experience within our team, we go in and we don't really rent widgets, we go in and help design a dewatering program and are able to do the complex dewatering planning where it takes multiple unique large pump sets and whatnot to do that. So that stands us apart. On a test pumping side, which runs into our rental market, our rental segment, test pumping, we are truly independent in the services that we provide. There's other guys out there that have test pumping services tied to drillers, meaning someone goes in, drills a hole and then does the test pumping on top of that hole to provide water or to test the water provision for the mine site. We're independent. Other companies can go in and focus on drilling and drilling the water bores and then we come in and test. And we're not testing our own holes, and we're also being able to work independently of the drilling rigs. So therefore, kind of this independent unique offering is where we fit in. There's not a whole lot of people out there that do what we do and are able to offer that wide suite of services. So therefore, we kind of fit into a few key areas that there's not a whole lot of competition. And just because of the nature of the Australian market being so large, there is greenfields ahead of us to be able to develop these.

Excellent. And so on that test pumping side, so what's the key benefit for the clients in terms of having that element of independence between the driller and the tester of the holes, would you say?

Well, a lot of times, drillers are under pressure, drill holes and move to the next one and keep drilling. And it's -- they're specialized in drilling. And it's 2 different subsets. In that, drillers are really good at drilling holes. Test pumping, it's key that you have to have unique equipment that you can run up and down the hole to do the testing, but it's really kind of data management. And that's where being able to work with clients to collect the data required, in the format required and give accurate, robust data, that's a different skill set, and that's a different business focus than someone who is doing a great job, but they drill a hole and move on to the next one, and they're working on meters per day, just trying to get holes drilled and move on. We come in independent and are able to show the -- not so much the drilling results, but it's also the hydrologist results of what they're expecting. But it comes back to data management, which is, again, it's a different mindset of someone sitting in the field, worried about data management than worried about drilling a hole.

Yes. That's a good point of difference, Michael. Thank you. So you touched on the carbon-reduction strategy and the hybrid systems that you're providing. Can you give us some insight into the R&D process that you guys have established and how that's progressed over the last few years in support of that strategy that you've established?

Well, we've taken our time before we dipped our toe in the market and actually started to purchase this equipment. So we've looked around. And we feel like that we have a few quality suppliers that we're working with that respect and understand what we bring to the table as well, what value we bring from an operational on-site type presence. And little things where things sometimes people take for granted, small diesel generators out there. They're a very robust foolproof way to achieve the goal. Hey, let's just put a generator there, put a small genset and it works, and they're pretty robust. The hybrid systems come in. And just because of the nature of it's a bit more technological, it's a bit of an upgrade in the batteries and solar and the electronics and whatnot, so it's not the brute force method. But for us, it's back and forth with the clients to say, "Look, here's the parameters that we need to have a set points and here's the key features that the person that is used to servicing or monitoring a diesel genset on site, this is what we need to provide them so they have some similarity in product." They have the same ability to do some basic troubleshooting and that sort of thing. So it's a bit more of taking what I think initially was a very high-spec slick offering and just making it practical. So working with our suppliers to make it practical, so it's going to be successful on a mine site and not have people put it in a too hard basket, bypass the batteries, bypass the solar and just run the generator.

Yes. Well, if anything, it's relatively cutting edge, making it practical and easy to use, the key isn't it? So that's good. In terms of the shape of the business, do you have the right level of staff now? Or would you be looking to hire more in any areas?

Well, as we go into our end of the year budgeting process and preparing for next year, I know that right now, we have our boxes filled. We have our org chart robust and filled at the moment. But what got us to this point is not going to take us to the next step. So we're always looking for good people. There's always the need for some good tradesmen on the workshop floor or some good tradesmen to be able to go to site. So that's a constant in this economy in Australia, trying to make sure we can attract those guys. We've been pretty good at retaining that trade base for this past year. And I think that helps show the results that we've posted that helps that. But yes, we're always looking for more people. I think, again, the business will begin to transform as we're coming to scale. We're reaching a point where from a revenue point of view, we have to look at our -- I guess, our corporate overheads are stable. But the rest of the business, being able to maybe expand or evolve our sales team, that sort of stuff, that's what we'll need to do. But generally, the budget process will highlight really boots on the ground, whether it's tradesmen or whether it's people like a sales force, account managers, that sort of stuff, who are touch points with the clients. The rest of it, we're pretty well sorted from an overhead point of view.

Sounds good. Some exciting spots to add some value there. We've just come to the final question that's come through just for the time being. So if any other attendees have other questions for Mike, please pop them into the Q&A box, and we'll take them up that way. So Michael, given the shape of your balance sheet, at the outset of the presentation, you did break out the various elements of the facility with NAB, which gives you plenty of flexibility. So given that capacity you've got there and also the recent positive cash flow that you've delivered over the last several quarters in a row, how do you plan to fund the expected expansion of the company and further revenue growth over the coming year or 2?

Well, the ideal way that we will grow our rental base is by the free cash flow, being able to reinvest that cash into assets. We would like to also use, quite frankly, bank debt for those assets. So I don't feel like that there's an issue. If we have quality assets that we're able to finance that are going to quality clients, that is one key way that we'd like to grow the business. From a working capital point of view to be able to allow growth in the maintenance segment, again, having a little bit of extra cash flow coming through as we've paid off our deferred consideration, that helps. But then also too, we're working through trying to manage our inventory and our stock levels and really optimize that to free up some cash. And that's been a work in progress over a few years. Again, as we've matured and had the right people that can come in and focus on that, we've been able to maybe draw down a little bit of our stock and inventory to free up some cash going forward. But for the time being, it's going to be through those organic methods. We don't have any plans anytime soon to raise equity. We don't feel like we need it unless there was a great opportunity for some type of acquisition that would significantly improve the company. That would be the only reason we might do that.

Sounds good, Michael. There's plenty for us to keep our eye on there. So as I said, that's all the questions that have come through for the moment. So we'll wrap things up there. And on behalf of the company, I'd really like to thank everyone for tuning in. We appreciate everyone taking the time and for their continued interest and support of Babylon. If you do have a question that we didn't answer today, please reach out. Michael and his team will be happy to discuss things further offline. We will also make the recording of this video -- this session available online at the NWR YouTube channel and also on the Babylon website. So really looking forward to the opportunity to talk to you again. Michael, well done again on a very strong half year results, and I'll pass back to you now for any closing comments.

No. Thank you, Tim. I appreciate you coordinating this, and thank you, everyone, for your time and attention. And my contact details are readily available through the ASX announcements that we put out. So if there's any follow-up questions or anything specific, I make myself readily available to everyone to discuss. Thank you very much.

Thanks, Michael. Thanks, everyone. Chat to you again soon. Cheers.