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

Good morning, everyone. Thanks for joining us today. Welcome to the Babylon Investor Update. On the call today, we've got Babylon Managing Director, Michael Shelby. I'll pass you across in a moment to Michael to kick off our discussion of Babylon's recent acquisitions, Matrix Hydro Services and Blue Hire and the company's growth strategy more broadly. So today, we'll have a presentation from Michael, followed by an opportunity for Q&A. [Operator Instructions] So to kick things off, I'll hand over now to Babylon Managing Director, Michael Shelby. Go ahead, Michael.

Thanks, Tim. All right. Good morning, everybody. I will scroll through the presentation and use as a talking guide, but I'm not going to hit every point word for word. So please ask questions at the end if there's anything we need to clarify. Exciting time for us. We've recently announced 2 acquisitions, which we believe will be transformational for the company, enhancing our rental segment. So we've announced the planned acquisitions of Matrix and Blue Hire. Both of these businesses expand our core capabilities. They're in line with works that we currently do, that's in our current wheelhouse with levels -- good levels of experience. They build out -- give us a broader customer base and broader depth of offering. Over the years, we've managed to grow very nicely over the past 5 or 6 years, but these 2 acquisitions do bring a bit of a step change going forward. So we feel like it's an exciting time for us to bring these on board, and we'll be working hard over the next few months and the next year to bed them down and have everything fully integrated and humming along. Overview of the transactions. They're both very similar in that we've structured them at a 3.5x FY '24 EBITDA is the pricing that we've used. Both transactions will have a portion of cash and shares upfront in a trailing payment based on FY '26 EBITDA performance. So they're both roughly 2.5x FY '24 earnings upfront and 1x trailing. With that on the trailing payment, we do have all cash to Matrix and cash and shares to Blue Hire. We expect the acquisitions to be completed in July. It's just a matter of going through some of the hurdles for the standard conditions precedents, both for the debt facility that we're using and also for the acquisitions themselves, but everything is standard for these type transactions. The funding for the acquisitions, most of you may be aware or hopefully aware that we have an entitlement issue in the market right now. We had an accelerated entitlement offer that we had take up of a couple of major shareholders that accelerated $1 million -- roughly $1 million early, and we have a trailing $2.5 million entitlement offer to the retail sector right now, and that has been extended an extra week to make sure that this news gets out in the market and everybody is able to fully participate. The financial impact of these acquisitions is quite transformational for us from an earnings point of view. Based on FY '24 performance, you look at a kind of a rough pro forma idea, we would have revenue up to about $54 million in earnings -- EBITDA earnings of about $14 million with the combined group. So it's exciting to have that big step forward. Both acquisitions will, like I said, broaden our offering and bring unique and experienced leadership as well where part of the excitement is not just the companies, but the vendors who's coming on board as well. Keen experienced entrepreneurial-type managers who will come in and get the support of our business to allow them to continue to do what they enjoy and maybe we can take some of the headaches of running a business off of them and let them really go flourish and grow the business from there. Individually, Blue Hire, the upfront consideration is about $18 million cash and shares. And the deferred consideration will be a range based on performance, but a minimum of $6 million and a maximum of $8.2 million. That will be payable roughly in October '26 after our full FY '26 accounts have been completed and been through the audit and announced. And this is all based on an EBITDA contribution of about $6.8 million from -- going forward. And so the total consideration will be about $24 million to $26 million. The shares will be escrowed for 24 months, and conditions are, like I said, standard for these type transactions, nothing peculiar or really different. Matrix, upfront consideration of $2 million in cash and $0.5 million in shares and an estimated about $1 million in a trailing payment. That's not subject to a minimum or maximum, but we're very comfortable with what we're seeing there. And hopefully, it's more than $1 million because the guys are performing and doing better, but we're looking at about a $1 million to $1.1 million contribution in payment. Again, shares there will be escrowed for 18 months and conditions for the deal and for the debt package are kind of customary for these type items. Strategically, these businesses are great fits. We have been working with these businesses for the past couple of years. We are familiar with the ownership group of both, and we've worked assisting each other, supplying equipment and people for the past year 2 plus for Blue Hire in the past year for Matrix. So we have a very good working relationship. So we feel like that the integration is well underway just for the fact that we have such a good working relationship before we even bring the companies in. These strategically fit our plans to grow the rental side of our business, the rental segment. We like the good recurring revenue that comes in from these businesses. These are both very lean, very high-margin businesses. So from that point of view, we're not expecting a tremendous amount of cost savings when we bring these businesses together. It's more of added value in that we hope that we can unleash the vendors, unleash the owners of these companies when they come in and take management roles to really flourish, grow the company, provide solutions to clients, maintain those client relationships and help drive the business going forward. And then it will be Babylon's job to really kind of take care of a lot of the back-of-house, the financing, the payroll, the operations and be able to really support these businesses and these management teams for -- to grow going forward. A bit of a, I guess, complementary to our current business, Blue Hire brings on a significant fleet of dewatering pumps and expertise there. Matrix brings on a more test pumping capabilities. These are quite complementary to what we already do. So it's natural bolt-ons. It gives us more tools in our toolbox to provide client solutions. And right now with Blue Hire, it does give us a good geographical spread, whereas Blue Hire is mainly focused in the Southwest of WA and out towards the area in the gold fields of Kalgoorlie, a bit of work there, whereas we currently are focused mainly in the Pilbara and a couple of other spots and there's very little overlap there. Matrix provides a good breadth of work for us because it expands some of our commodity base to some of the guys they're working with and also working for some of the majors doing the test pumping work as well, and it has great exposure for us to expand our works there. So we feel very excited not only for the assets that come on board, but the capability and also the leadership that the owner groups will bring with them. I touched on some of these points previously, but the combined fleet will be significantly larger for the group going forward. And that allows us, like I said, a lot more tools in our toolbox to be able to provide customer solutions. We're focused on rental. We're focused on water management. And again, the beauty of the test pumping businesses, they have early entry into projects, whether it be mine -- greenfields mines or mining expansions. So we get our foot in the door with their working, developing those client relationships and then allows us to bring on the back end the further water management activities that we do to round out activities on site once a client relationship has been established. So we feel like there's a lot of synergies to the market going forward by having these type businesses within our rental segment continue to expand. A good client base. We don't really have a whole lot of overlap because we've been working well with both companies going forward. There's not going to be any cannibalization of work. We feel like it's just a strengthening of our offering. And again, these businesses coming in are rental. They're very lean, very high-margin businesses, and we want to make sure that we can continue to focus and work with discipline to continue that trend as well. And we feel like, like I said, this cross-commodity and cross-region exposure with these businesses and really kind of just diversifies our earnings and our exposure going forward. So it's a larger derisk to Babylon as a group, getting the scale, getting the diversity, getting the management teams and relationships they bring in really derisks us from being a really very micro, small competitor in the grand scheme of things to be able to get some scale, which brings with it a bit more resilience to us and confidence going forward to attack the market. Just a quick snapshot. And we're really focusing on what these businesses have achieved in 2023 and 2024 and using that for our, I guess, our thoughts going forward. We're not going to give guidance, but we feel like the businesses have been strong. Matrix has been on a high-growth trajectory as a very young business, whereas Blue Hire has been growing year-over-year, but it's a bit more established. Again, we feel like that -- quite comfortable that the combined revenues would be about $54 million and EBITDA of about $14 million, and that's really based on what we've seen in FY '24. Again, no synergies are really assumed from a cost cutting point of view, but we feel like there are synergies that we can then unleash talent into the market to grow the businesses. One aspect of the deal is the debt package that we will have in place from NAB, who's our existing banker. We have a plan to accelerate payments to really manage the debt and make sure that we have a good record of discipline in making sure that we can manage that debt and derisk ourselves. Again, a bit of an overview. We expect to double our EBITDA. We focus on our higher-margin rental business focused on water. It's very technical, both of them. We feel like we're getting good experienced players as well to help broaden our technical experience, with the funding from NAB is up to $21.2 million in a new facility. That comprises $18.35 million of debt to close these transactions, to complete these transactions in about $2.8 million of existing debt that will be wrapped into that debt package. That accompanying with a $3.5 million equity raise gives us a little bit of working capital, a little bit of opportunity to make sure that we can comfortably integrate the companies, have a little bit of opportunity for growth, so we don't just have to sit stagnant for a while, but we will be able to strike and seize opportunities. We're having a bit of working capital there and a little bit of cash up our sleeves. And yes, we're very excited for what's going to happen in FY '26 when we have these businesses on board, and we go out and execute. Should have a nice step change in what we're able to deliver from a financial return. A bit of an overview of the entitlement offer. Like I said, it's still open, and it will close. It's been extended a week to close on Friday, the 13th of June, lucky day. But we're seeing a good uptake so far from existing shareholders. And we feel like it's a nice strategic play to let existing shareholders, like people who've been with us for the long term, participate and take part in the growth going forward. A bit of a pro forma after completion of what we're looking at here, the shares on issue and the shares that are being issued for the entitlement offer. And I do have a question that comes up a lot, and I'll just address it right at the front end, and that's the share consolidation. And it is something that the Board regularly discusses and thinks about. And we will be looking to really put something forth to shareholders probably at the next AGM. We have a lot of moving parts getting these deals done, but we do feel like it's important that we -- after these deals are done, we take a deep breath and talk to shareholders and get to everyone's two cents about what we want to do, and we'll put something to shareholders come AGM time about doing a share consolidation to clean up the large number of shares that we'll have on issue. And it's the obligatory Board photo. And yes, really, they're open up for questions. Hopefully, we've picked some interest and got everyone's attention with these opportunities. We're excited about what they're going to provide for us going forward.

Absolutely. Thanks for that overview, Michael. And it certainly is heartening that the market seems to have given its approval in the first instance to the acquisitions to the extent that, as you said, the uptake from existing holders of the entitlement issue has been encouraging. And the stock is trading last time I checked pretty comfortably above the price of the equity raise. So to that extent, and before we get into things, just as a reminder to attendees, please just pop your questions into the Q&A panel, and would love to delve into what you're thinking about the deal and about the business. But to that extent, we've talked obviously about the numbers and the integration path and the confidence you've got there. Do you think there's anything that the market could still be underestimating about these acquisitions or about Babylon's positioning going forward?

I think that the numbers will kind of speak for themselves. It's really been for us to prove out those numbers and execute on those numbers. But I think that there's a lot of the unsaid and the unrecognized time. It's the capability of the team. And I think what I'm really keen about what I really -- it's kind of hard to quantify for numbers people, but the management team and the level of talent that we have there and the commitment that those guys have, the entrepreneurial spirit of building and growing some businesses, but also their commitment to come into the business for us as well and work with us, I think that that's -- it's hard to quantify, and sometimes it's underestimated. But especially in small businesses and businesses that are technical, the strength of the people can be underestimated. And I feel like that that's something we're -- I'm hoping that we can show some surprising upside about getting some people in with some good structure and some support from a bit larger company around them to really let them execute. So that's what I'm excited about.

That's it. I mean the RWG talent coming back, you're getting the band back together, and yes, there's an opportunity there to really impress people. So just on the financials, we've had one investor asking if we can confirm what Babylon's current EBITDA is now pre-acquisition of the 2 businesses. So I think at the half year, it was 3 -- we announced $3 million for the first half EBITDA. Was that right?

Yes. So it was $3 million for the first half, and we can't really announce that information on a -- in a platform like this. It's going to have to be when it comes out for our results at the end of the year. We've got about a month or so left, and then we'll be putting some information out with our 4C and then our full report later on. We've been tracking well. We're going to finish the year strong. As always, you have a bit of a slow period in the December, January, a bit of seasonality in the mining services sector where people aren't doing site works, that sort of stuff. And we did see some softness with the pricing of iron ore at the end of the calendar year and people making decisions and then a little bit of uncertainty when -- with the inauguration of President Trump in January. A lot of people are kind of sitting back and maybe not spending money, not doing things. So yes, there was a bit of a slow period during that time, but we've really picked up steam, had a really good rental revenue month last month, and it's just a matter of timing to make sure that we can execute everything on the maintenance side of the business and the maintenance segment, but we're planning to finish the year strong. And then obviously, a lot of people defer some spending into the next financial year, and we're seeing a lot of work kind of being discussed and lined up for early in next financial year on -- especially on the maintenance side. So yes, that's probably the best answer I can give with a little bit of context there without getting myself in too much trouble.

Exactly. That's great. Yes. So following on the question about earnings, how should we be thinking about Babylon's margin profile over the next year to 2 years as you bed down these acquisitions?

Well, the fact that these are both sitting in the rental segment, they tend to be a bit higher-margin businesses. And that's kind of been our focus. We're happy with the maintenance segment. It makes good money. It is a bit of a lower-margin business. It takes a bit more working capital. It is a bit more management-intensive to manage that business. And that's kind of why we've strategically said, look, if we're going to bolt on some businesses and bring in some scale, we want to focus on the rental side. And with that scale comes the higher-margin earnings. I'd say nothing beats a quality piece of equipment, a quality asset out on site, getting just that recurring revenue day after day after day as it's on higher when that quality asset doesn't really require a lot of thought on our end. There's thought and technical analysis to acquire that piece of gear and to size it properly for the acquisition -- I mean, for the application when it goes out on site. But then that's why we really like the rental business is to be able to focus on that and get the gear out. So we expect overall, these -- the revenue from these businesses will be at higher profitability.

Good stuff. Comment from an investor who's new to the story, the attention has been drawn to the level of debt relative to the market cap in cash. So are you able to comment on Board and management's approach to balance sheet management in next financial year and FY '27?

Yes, it's something we're very much focused on. It is a highlight that we all have quite a bit of robust discussion and thoughts about. For us, we chose to go down this path because we do feel like our share price is not reflective of the current value of the company. So therefore, we didn't really want to raise a significant amount of equity at a low price. We worked with our existing bank, NAB. We had external service providers as part of this acquisition process. We used external service providers for due diligence, but the due diligence was also performed on Babylon itself to be able to provide the level of comfort to the bank to have them then poke, prod, stretch and look at all of our metrics for those guys to endorse the term sheet that they've given to us. So we feel like we've had a robust process. We do acknowledge and understand that it is a significant amount of debt, but we also have a plan to make sure that we manage that, and we show the discipline to manage that, pay it down. And we do have an agreement that for the deferred consideration, we will be making some extra payments into our debt package with NAB under the plan to be able to redraw some of that prepaid or early paid debt to be able to redraw upon deferred consideration payment. So it's something that I think we'll put our actions, our money where our mouth is and be able to show that we're paying it down early and paying it down to be able to do that redraw so that we can handle that debt.

Good stuff. So being mindful that there probably are a few investors new to the story, so just I guess to take a step back from -- look at it from a distance. When investors look at the industrial services sector on the ASX, they often can assume that it's kind of a crowded space. So are you able to talk to where Babylon sits competitively and really highlight what makes the company defensible within that landscape?

Yes. So we're a very specialized provider in a crowded space. The fact that we focus on water management, it's not just an area that any person can get into. It does take a bit of technical knowledge, and it is fairly capital-intensive to acquire, to build the pumping assets that we have. You take that intensive capital requirement, but then also the intensive intellectual requirement, I would say, to understand the application of the pumps. We have a lot of guys with decades of experience in pumping. So therefore, we have this unique offering that we can go into. And we provide services directly to mine sites. Yes, there's the odd piece of business that we go to other large service companies as well. But generally, we're working directly with the mine owner-operator because it is a critical area. And water is an issue at pretty much every mine site. You either have too much or not enough, and it can quickly make life difficult for the owner-operator if it's not properly managed. So everyone takes a bit of a different approach. Generally, there's a blended approach where guys like to own their own assets, their own pumps. You can never own everything you need. So that's where we come in. We're able to rent assets into the site, and that gives them flexibility to have the proper assets for the conditions because you have rainy season, you have dry season, you have operations that change, and you need more pumps, you need less pumps, and that's where we come in and are able to provide that guidance and the assets to allow them to effectively manage their site. It's an afterthought for a lot of people. It's an afterthought. It's not something that makes them money. It costs them money to rent these assets, but then the big cost is if it doesn't go well. And we feel like we have the track record as a company. We have the track record of the individuals who have built this company to really have the credibility in the market to go and solve problems, solve them properly. And that's where we -- we're able really to defend our position because it's not just a matter of somebody coming along with a checkbook and saying that they want to purchase a bunch of assets and say they're going to be a pump rental company. That's great, but that becomes a bit more of a general higher business, whereas we are very specific in how we approach the market, everything from the test pumping business, which is a lot of data management on the front end, it's a lot of know-how and a lot of managing and producing that data for clients through to the day-to-day water operations and water management operations with the pumps through to the back end and helping get rid of water maybe through assisted evaporation, through unique ways of helping them solve their problems there. We're not a cookie-cutter company, and having the specialized assets, the specialized knowledge allows us to really carve out that niche.

Excellent. No, I think that's increasingly apparent, the -- yes, the defensibility of the company and just the way the business model is continuing to develop as you sort of flesh out these parts of the value chain that you've identified. So I guess through the change of the upcoming -- or the recent acquisitions, one thing that does look to be continuing is Babylon's focus on a high-quality client base. Can you talk about how that supports your business model, the focus on your Tier 1 clients, and how sticky those relationships have been and should continue to be?

We want to work for people who value our services. And our client base is the top-tier mining houses. I can say our largest rental client is Newmont. Our other largest -- second largest would be BHP. So we work at various sites for these guys. We do a lot of really value-add work for them. And we feel like we're valued by those guys. So that's who we choose to deal with. We are seeing a lot of good opportunities right now with the way gold has had a good run. There's a lot of gold miners out there, a little operators that we're doing some test pumping work for that sort of stuff. But we truly try to make sure that the Tier 1 guys are -- they're our bread and butter. They're who we deal with. We have our ISO accreditations for quality, for safety and for environments, and we tick the boxes. And from day 1, I've always said when we founded the company, we want to make sure that we don't give anyone any reasons why they can't or shouldn't do business with us. So being a listed entity and having those qualifications, it makes us very easy for the big guys to deal with, and then we back up that with good performance, and that's where we want to be. They have the challenges. They tend to be the gorillas in the room, but we also feel like we hold our own and are able to provide good value to them. And it's a good reciprocal-type business relationship with those guys that we -- we're able to provide solutions, and we feel like we get fairly treated for it.

Excellent. It's a good place to be in. So we're just coming to our last couple of questions from attendees. So anyone else who's got questions for Mike, please pop them in, and we'll hop straight into them. One investor is asking if the rental assets from the Mount Keith site, BHP's Nickel West site, have those assets been redeployed?

Yes. We've been working to redeploy those. It doesn't go as one full swath in and out. So as many people may know that BHP and Nickel West placed a lot of their assets into care and maintenance. And we had over a 6-year relationship with Mount Keith, which is one of the mine sites. So we had a 3-year contract that got renewed for another 3 years, and then we've got another extension on there. So it was something that, I guess, the back half of the calendar year, we had a lot of gear that came off in roughly October time frame. That gear came back into our yard, got a good tidy up, and we're starting to see that go out in chunks. You're not going to have 50 assets in, 50 assets out. But we've been able to pick up a bit of work with some of the other majors. And so right now, we have a very strong relationship with Glencore, and we've been able to utilize some of the assets from Mount Keith, turn back around, and we have them either at or planned to go to some Glencore sites as well. So people recognize the value of our assets, the value of our offering. It does take some time. It's not a day in, day out-type thing. But that's the nature of [indiscernible]. We feel like we've got the people and the capability to turn those things back around. So long term, it's maybe a bump in the road, but not a big deal on the long-term for us.

Good stuff. And so following the Blue Hire and Matrix deals, should investors expect more M&A? Or are you focusing now on integration and organic execution?

Yes. We will [indiscernible] it's definitely [indiscernible] integration [indiscernible] and execution going forward. Our desk always have [ eye out ]. So I'll never say never, but our focus is definitely on integration, execution. But when good opportunities come across, we always want to investigate those opportunities. But I think it's the prudent thing to do right now is to really focus on just executing what's in our hands at the moment.

Excellent. So that's all the questions we've had. So we'll draw a line through it there. And on behalf of the company, I'd really like to thank everyone for tuning into the Babylon investor update. We really appreciate everyone joining us and for your interest in the company. If you do have a question that we didn't answer today, please reach out, management will be happy to discuss further offline. We'll also make the video recording of this session available online at the NWR Communications YouTube channel. So yes, we're really looking forward to the opportunity to talk to everyone again. And Michael, I might pass across to you now for any closing comments.

No. Thank you, Tim, and appreciate everyone's time. And yes, my details are readily available. I'm happy to discuss in greater detail if there's questions or stuff that people forget, but we feel like it's a great opportunities that are in front of us and an exciting time for us and looking forward to executing going forward.

Excellent. And yes, a final reminder, as Michael mentioned earlier, entitlement offer to existing shareholders is running until Friday, the 13th of June. So consider that, and to get your response ahead of the date if you're eligible. And other than that, we look forward to chatting to you again soon.

Thank you.

Thanks, everyone. Bye.