Emeco Holdings Limited (EHL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Emeco Holdings Limited FY '23 Interim Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Ian Testrow, Managing Director and CEO. Please go ahead.

Thank you very much. Good morning to everyone, and thanks for joining Emeco's results call. I'm joined by our CFO, Thao Pham. You have seen from the announcement released this morning that after 12 years and a massive amount of work across finance, strategy, M&A, risk and legal, Thao advised me that she's looking to retire from the business. I understand she's going to [indiscernible]. I have to say while disappointing to see Thao go, she departs with the very best wishes of the entire Board. Thao has worked tirelessly side by side with me and the Board over the years as we've restructured and refinanced the business. I'm going to absolutely highlight the refi in 2021 which replaced our expensive U.S. high-yield bonds, we have Australian bonds at a great rate locking up to 2026. That was hugely important for the business. And also, Thao's been absolutely pivotable and working closely with us as we've transformed this business from being a [indiscernible] rental business into a business that's got on-the-ground retail maintenance, much more value-adding rental as we apply services. And if you look at the revenue when we first started on this journey about 7 years ago of about $200 million a year up to forecast around $900 million a year now, which really shows the transformation we made in the business. So an actual pleasure working [indiscernible] we've got over the next few months. I'm also really pleased to announce that we secured the services of Theresa Mlikota as the Chief Financial -- CFO moving forward. Theresa will commence employment with us on 8th of May. She brings a wealth of experience and resources and contracting monitors. So I'm really, really excited about working with Theresa. I'm looking forward to it. Theresa was most recently the CFO of Adbri. She was previously CFO at Ausdrill and [ now Perenti ], Thiess, MacMahon and Barminco who's who in the mining services world. She has also senior leadership roles across the energy and mining sectors. So really looking forward to working with Theresa I think just picking the heats of the first half. Thao is staying on to ensure a seamless transition, and I'm sure you'll join me in wishing Thao the best in her next adventure. Now on to FY '23 half year results. I'm on Slide 2, and I'll quickly run you through the key numbers. We can see that we've again delivered strong revenue growth across the business, which reflects our market position and strong demand from our customers for our services. As we flagged back in October and at the AGM in November, this half has been hit with the operational and financial impact of payments for our long-term [indiscernible] customer. This has allowed us to take decisive action to cease activity at each project and t., o exercise our right to terminate contracts. And this means that we demobilized our equipment and people from 2 underground projects and 2 open cut projects. Whilst we do not believe there is a systemic credit risk in Pit N Portal, we took this opportunity to review the portfolio with a focus on contract governance and to ensure that we reduce our exposure to customers with their payment performance but not at a high level we expect from our counterparties across the group. As a result, we terminated an additional open cut project. Thao will provide you a more detailed update where we're at with that including the details of us taking provision against $22.9 million in the statutory accounts. As you'd expect, working very hard to recover the funds and we have another payment scheduled to be received this week. But as you can see, the loss of revenue and earnings from the terminated projects as well as the termination, demobilization and restructuring costs we incurred the expense the real impact on our EBITDA, EBIT, NPAT and our free cash flow in the first half of FY '23. We also had to manage through the massive East Coast weather events that have also had an impact on our results. The Board has maintained its capital management policy, maintaining the $0.0125 fully franked dividend. This equates to 34% of operating NPAT, which remains at the top end of our capital management payout range. The Board has also refreshed a 10% buyback that we put in place last year, which allowed us to reconnect to buying back stock. Just turning to Slide #3. I'd like to highlight the following: Group EBITDA is at the upper end of our guidance as provided at the AGM in November. Eastern Region Rental has achieved strong revenue growth but earnings have been held back by extreme weather events. The business is well placed to utilization and earnings growth we report. Western Region Rental has also achieved strong revenue growth. Earnings have been held back by the terminated Pit N Portal open cut projects, where the Western region were renting into Pit N Portal. The Western region team has done a great job finding new projects with its equipment. And you'll see an earnings growth coming forward in the second half. Pit N Portal was impacted by one-off termination and restructuring costs as a result of us terminating projects. On a really positive note, a fantastic job restructuring the Mincor contract to create a win-win for both parties and this long-standing project with Mincor that will absolutely provide our baseload earnings from which to grow the business moving forward. So I'm really proud of that. Our balance sheet remained strong. Thao did a great job extending the RCF to December 2025 with a 2-year extension option. Yesterday, Fitch Ratings acknowledged the strength of the business for a credit rating upgrade to BB-. Our return on capital remained solid at 18% across our Rental business. However, the full impact of PNP issues reduced this temporarily to 13%. you can see from our commodity diversification on this slide, that remains a key focus and a key factor with the resilience of this business. On Slide #4. We are reaffirming our operating EBITDA guidance at the range of $245 million to $260 million EBITDA, which implies a strong rebound in operating and financial performance in the second half of FY '23. We expect strong growth across the Board operating segments. Our fleet is well positioned in both the East and the West. In East, we expect the utilization will continue to build as we commence 2 fully maintained EOS new projects. In the West, we have several projects commencing that will provide earnings growth. Pit N Portal will rebound strongly in the second half through the restructured Mincor contract, plus the contribution from the redeployment of assets, plus the fact that we don't have -- we don't expect the repeat of the significant one-off costs incurred in the first half. Force continues to be a powerful business to the group. It's central to our midlife asset model. Demand for our services continues to build. In particular, we're seeing strong opportunities to come through for retail work in the Eastern region, including on relationships with our existing rental customers. We expect cash and returns to improve in line with the earnings recovery. Turning on to Slide 5. We've updated our strategy side. I just wanted to talk you through it. We have an unrelented drive to build resilience and profit, strong returns in this business. And the 3 pillars of our strategy are: Fit, create and sustain. Fit is about the competitive advantage and competitive cost advantage and quality advantage we create through the Force business. Whether it be underground or open cut equipment, we buy cores and we rebuild through Force, put them out to work with great quality and reliability build absolutely cost advantage from a life cycle perspective versus what our competitors do. So important Force is for us. Create is where we take that competitive advantage and work closely with our customers to see how we can apply it to the project to increase their project profitability, increase the economic life of that project, really contribute and form partnering relationships with our customers. We do that for understanding how to best use our equipment, our EOS technology and use of our maintenance services in Pit N Portal's situation in regard to the use of the operators and the expertise and the engineering. That's really important part to take our equipment, strategic cost managing project layer our services on top to create value. But that's the heart and soul of our business. And it really is around that: Excellence and competitive advantage we create for our ability to acquire cores and rebuild the cores put them to work with our customers. Sustain is a part of the business where it's around operational and commercial discipline. It's around diversification, it's around capital structure and optimizing the allocation of our resources. Now the situation in Pit N Portal in the first half has highlighted that we need to continue to build and improve the robustness of our systems and processes around risk management, which is an absolute key focus. Okay. On to Slide 7, Safety. Safety is and always be our first priority. We remain LTI free for up to 7 years now. We continue to invest in people, training capability, systems and processes to ensure we continually improve our safety performance, absolute first priority, #1 priority for us. I'm proud of the way [indiscernible] is improving and looking to build out robustness in this area. On Slide 8, people and culture. I mentioned when I was talking about Thao earlier that over the last 7 years, revenue has gone from $200 million a year to $900 million a year forecast this year. That's our fit and the service that we provide increases our value back. So people are absolutely the most important thing in our business. Everyone knows Australia is a tough market, stable at the moment. So recruiting, training, retaining people is absolutely imperative to us. We invest a lot in that. A project alignment is very successful, and we keep building on that. That's something we're very proud of and something that we've focused very hard on. We got some feedback from people when we [indiscernible] and to assist to contribute more to the local communities in which we work, and we've done that. It's been great fun and really satisfying [indiscernible]. Thanks for the team on the work in people and culture has been really great. Moving on to Slide 9 in ESG. During the half, we completed our ESG materiality, the assessment with the help of [ KPMG ] which has been signed off by the Board as our novel strategy. John Worsfold has taken up the leadership of this [indiscernible]. And we're now in the design and implementation phase. I will now hand over to Thao to talk through the financials.

Thanks, Ian. So turning to Slide 11, which essentially summarizes the information presented in the earlier slides, you can see the first half comparison. We've done it against the second half of FY '23 in the prior 6-month period and then also the prior corresponding period. We think this gives you a feel of how the business is performing. As Ian mentioned, revenue has continued to grow across all segments, reflecting strong demand for our equipment and services. Operating EBITDA came in at $113.5 million which is at the top end of the guidance range we released at the AGM of $109 million to $113 million. And as Ian said, Pit N Portal's performance has impacted the group's half, and you can see the slowdown through the P&L. Operating EBITDA margin is reflective, obviously, of the Pit N Portal project termination through the one-off costs we absorbed in the first half and then the ongoing inflationary pressures across the business and the impact of the continued extreme wet weather in the East, which is well understood. Pleasingly though, we have increased the level of services that we provide to our customers across Rental, Pit N Portal and Force business units. Growth in our fully maintained projects as well as cross hires, which is where we rent assets from third parties and on-hire to our customers to provide our whole fleet of solutions naturally comes at a lower margin. It still generates strong returns for us and is part of our strategic plan to build long-term customer partnerships. This helps create value and embed us in our customers' operations, driving contracting. Operating EBIT reflects the new AASB leasing standards, which is driving depreciation this half. Essentially, we have renewed a number of property leases for our Force workshops in the half as well as our head office lease. We also leased commercial light vehicles, particularly in the Pit N Portal business, so that's coming through the depreciation line. Our return on capital being the last 12 months EBIT over the average capital employed about 13%. However, the group's ROC, excluding Pit N Portal, so essentially the Emeco Rental and Force business, delivered a return of 18%, which is well above our cost of capital. In Slide 12, we deal with the outstanding receivable that we drew the market's attention to in mid-October and where we gave an update at the AGM in November. So as Ian mentioned, this was a long-term Pit N Portal customer we were doing work for when we acquired this business in 2020. I just want to reiterate that there's no dispute to the services provided or the amount that they owe us. We have made some progress on collecting this -- collecting from this customer. We last updated the market in November. We received the part payment in late December, and we're expecting another part payment this upcoming week. The matter is still subject to further action, and our recovery efforts are ongoing. However, the recent payments have given us a little bit more confidence of recovery. So at 31 December, the uncertainty has been reflected in our account by way of the expected credit loss charge to accounts receivable, and the impact on the P&L is reflected out of the statutory level. Slide 13 provides a reconciliation of the operating financial results to statutory results where you can see this impact of the $22.9 million specific expected credit loss allowance, which the Board has prudently raised for the outstanding receivable. So the $22.9 million essentially assumes payment this week and is the balance of the outstanding receivable. Aside from ceasing operations and demobilizing our fleet and people from the 4 project sites we had for this customer, 2 underground and 2 open cut, we also took the opportunity to review our contracts and counterparties. And as Ian referred to, we started to terminate an additional open cut project where we considered the counterparty risk was outside our desired levels. So the Pit N Portal and Western region rental businesses have incurred and resolved some one-off costs this half as a result. Jumping to Slide 14 and cash flows. You can see the impact of the outstanding receivables claim in the working capital build and also increased finance costs with some interest incurred as we drew on our revolving credit facility to provide the liquidity buffer during the half. Our component rebuilds and asset replacement expenditure was roughly $60 million for the half. We continue to remain disciplined with our spend, and we will continue to manage CapEx slightly. We have reiterated our full year sustaining CapEx guidance of $155 million to $160 million. In the half, we also invested a further $4 million in component inventory as part of our supply chain risk management strategy. You'll recall last year that we invested $6 million in securing some good value truck hauls. And this half, we have invested a further $9 million in rebuilding 9 of these to meet the demand we see in the business. This was done through our Force workshops, and our plan is to rebuild the remaining 9 cores in the second half. Our balance sheet on Slide 15 shows that our net leverage is only slightly above our long-term target of 1x, notwithstanding the Pit N Portal receivables issue, and we expect this to come back down as earnings grows and working capital normalizes back to previous levels in the second half and beyond. We also successfully refinanced our revolving credit facility towards the end of the half with our existing lenders. So we've refreshed a new 3-year term with a 2-year extension option at our election. As you know our notes [ in AGM ] until 2027. And pleasingly, despite the receivables issue, Fitch has upgraded our rating one notch to BB-, which reflects our improving financial strength and resilience, and this is even after taking into account the receivables. Moody's also recently upgraded our rating outlook to positive. I'll now hand back to Ian to go through some more detail on the segmental performance.

Thanks, Thao. Just moving on to Slide 17 in Rental. I'll just go through these slides quickly [indiscernible] in the earlier part of the presentation. As you can see, strong revenue growth has come through in rental. Demand for our services is strong. We've got some good rate increases across the fleet where we placed new equipment to work into our rise and fall mechanisms. I'm proud of the way the team is taking advantage of tight equipment market. You see that earnings is pretty flat in Rental for the first half. That was only due to wet weather in the East and the demobilization of the Pit N Portal projects and one-off costs in the West. But moving forward, we are pretty excited about the business. [indiscernible] I've seen as much activity in the half in regard to both East and Western side of the project. Very exciting And new EOS projects as well and fully maintained projects. So right [indiscernible] our strategy, the projects that are at -- are feeling really good about that stuff. You can see the margins come off a bit, a little bit with inflation and also just the impact of the wet weather and the Pit N Portal one-off costs and rental coming off from Pit N Portal in the West. I think you'll see a bit of a recovery from those EBITDA margins of utilization increase and you'll certainly see earnings growth coming through in the second half. As Thao mentioned, our margins will get much lower than historical high, simply because we're providing more sets to our customers. And we see that as absolute -- right in the middle of our strategy in regard to differentiate our service from our competitors. So a tough labor market, particularly for skilled maintenance people in Australia at the moment and our ability to provide equipment solutions to provide fully maintained. Even though we don't have the fleet, our customers are asking us to provide some pieces that are not part of our core fleet and to manage them for maintenance as well. So it's just laying on those services on to create daily and a long-term partnership agreements. So just can be a touch lower on the EBITDA margin, but it's all about return on asset, return on capital. We're feeling really good about both Rental businesses. If we turn to Page 18, specifically the Rental Eastern region. As mentioned, this reflects because of the impact from the excessive wet weather and flooding on the East Coast. Hopefully, we've seen the last of that move forward. Business has done particularly well in creating some new projects in the East. Thao mentioned that we've rebuilt some trucks from some cores that we purchased about 12 months ago. So it's great to actually see the model work in regard to -- we buy these cores, very little to hold them, see demand build, we put them through ports, if a great product came out [indiscernible] and we put them into projects to create value for our customers and get growth for us and a strong return. A great example of how our model works, part of the way that's been in the Eastern region are building the business and embracing the strategy. Page 19, the rental in the Western region. Team managed grew pulling the plug on some Pit N Portal projects with our rental equipment into. They managed it particularly well, and they've got great job in finding new work for [indiscernible]. So the second half of '23, placing a lot of gearing to new projects. Very, very differentiated in the West by the provision of maintenance services and skilled maintenance people, particularly tight labor market in the West and our team's ability to provide that full service is really, really important. And you'll see the growth come through in the Western region in the second half, along we've continued build on our EOS technology and the value proposition. We're feeling good about the Western Rental business. Just moving on to Slide #20, which -- about Pit N Portal, which Thao and I've already spoke about in some way. While it's disappointing and frustration by the underperformance of payment issues, we haven't placed this crisis. We've taken decisive and proactive step to terminate contracts. In addition, we've not taken lightly given the significant cost and dislocations we've had on Pit N Portal and our financial performance in the half. We've also renegotiated -- on a very positive note we've negotiated Mincor contract. It's our major project. It's the base earnings that will be growth in this business going forward. I'm really proud of the team, both the Mincor team and the Pit N Portal team. The way they sat together and renegotiated this contract, it's obviously crucial for both organizations. And I think that's a structured contract, which gives us the ability to achieve the returns that we need to and create a growth well. So I think that's a real basis given there's plenty of [indiscernible] in that project in building a long-term partnering relationship. So I'm really proud of [indiscernible]. We expect considerable growth in Pit N Portal going second half to recover from the first half the one-off cost that we in the year that we recovered from the projects that we terminated, putting them to new work and also the restructuring Mincor projects. I'm very confident we'll get a very strong second half rebound on the Pit N Portal business. Jim Gawith commenced in January as the CEO of Pit N Portal. Jim assumes control of the business with the rebase complete. Jim's got some fantastic skills and experience in underground mining, and he brings a real strong operational performance to the business, improved operational performance, commerciality, contract governance, and I'm really feeling good about Jim and the business and [indiscernible] Pit N Portal that we'll follow. Pit N Portal is absolutely a key part of our business, the diversification of open cuts and underground, there's customers that we provide both those services to. So it's a really important [indiscernible] for growth and commodity diversification. Welcome, Jim, and I look forward to keeping [indiscernible]. Turning to Slide 21 and the Force workshops. It's been a really busy half Force, as you can see, new retail business has been secured. Internal activity has been so, including the new truck rebuilds, which I can say is such an important part of our business that strategic cost advantage Force will access underground and open cut equipment. As you can see, the margin has declined, which is attributable [indiscernible] due to works having a large proportion of parts, which attracts a lower margin and more labor intensive works where we make greater margins. I'm always enthusiastic when I talk about Force. It's a centerpiece of our midlife asset model driven to be the life cycle and highest quality provider of equipment. And as I mentioned, an example of those truck core rebuilt through Force and our Western Eastern region will create new projects and bring them to work. That's fantastic. And as Jim builds on this Pit N Portal business, we've seen that from the same model actually that by underground Force. Rebuild them through Force and put them out to work. It's really important for us. Seeing some really good opportunities to grow for us in the Eastern region, but our existing rental customers. So that's a good work going on there. Conclusion to wrap up. As I said at the beginning of this call, Emeco [indiscernible] some challenges during the half, and I'm pleased with the way we've responded proactively and decisively. We position our fleet and services across a diverse customer base, and we're set for good growth. We do not waste the prices of Pit N Portal. We've rebased and restructured, and we're all set up for growth moving forward. I'm very proud of the way we've renegotiated with Mincor in a way that builds the partnership into the future. I'll now hand back to the operator for questions.

[Operator Instructions] Your first question come from Jacob Cakarnis with Jarden Australia.

Just wondering if you can give us a sense, please, [indiscernible] materials about some of those costs or dislocations associated with the contract exits in Pit N Portal in the first half, please?

The costs associated with terminating projects, the 2 bulk cost was termination of employees to some of the Pit N Portal employees that couldn't be redeployed. There are some redundancy costs there. I think historically, we take them below the operating EBITDA line. But this half, we just decided to absorb it all in the Pit N Portal operating number, demobilizing equipment as well after the cost to bring it back.

Both in Pit N Portal and Western Region.

Yes, correct. Both in Pit N Portal and the Western Region, back to the EBITDA workshop for the next project. And then usually when you have assets coming off, you just spend a little bit of money to prep the assets so it's the next project as well. So they're probably the key -- 3 key areas. There was also probably a little bit of cost around general restructuring of the Pit N Portal business. So obviously, losing 5 projects, there was some kind of restructuring and redundancies there, which we also talked to the operating EBITDA line.

Okay. Guys, Yes, interesting that, that was taken above the line. Ian, just one final one for me. Just for the rental business, if you talk about maybe the cadence for EBITDA margins into the second half for the Rental business. Should we expect that they're above that first half level and kind of getting towards where you've been like you're saying on strategy midterm?

Yes. I expect margins in the rental business to recover both in Eastern and West.

The next question comes from Nicholas Rawlinson with Jefferies.

Maybe one for you, Thao, just on the receivable. Could you just confirm how much you've actually received now and what you're expecting to receive imminently?

So I will say that at the moment before we receive the payment which we're expecting this week, it's $31 million, and we are expecting will increase this week. So it brings the outstanding balance to $25 million, but the amount of the allowance is $22.9 million because you take out the GST component.

Okay. Great. And given that the previous part payments, what level of confidence do you have in receiving the outstanding amount or at least part thereof?

I'm confident we'll get a chunk of it.

Okay. And just lastly from me. In your guidance, you mentioned revenue growth in all segments in the second half -- so you mentioned growth in all segments in the second half. Is that half-on-half or year-on-year?

Half-on-half.

The next question comes from Tony Grieco, private investor.

Yes. Hate to sort of labor the Pit N Portal receivable issue, but just wondering how far back it goes. Has this customer been a bad slow payer for quite a while? And have the orders picked that up and highlighted it in previous months -- previous orders?

I'll let Thao address the question on it.

So around the audit, this was not previously raised as part of the order as a concern, there's a history in terms of trading with this particular customer is a history in terms of payment. I think it's fair to say, given it's a long-term Pit N Portal customer, the history has been that they have been regularly either late or early payers. So it's probably fair to say we did think that the money was coming throughout, I guess, the months leading up to our announcement in October. I mean a bit of color is that they are...

Just a pinpoint dealing with these guys since 2017. They are a state-owned entity. They are owned by China, Chinese government.

Yes.

The money has always come from China. It's either come later or it's come early, but it's always come through. Unfortunately, something has changed in the course out. What we found our thinking is that [ governor ] province that owned the company got chucked [indiscernible] New governor came in and said, [indiscernible] and basically froze it. We went told about that. We didn't know about that. We were assured that money is coming in as soon as we got the idea that it wasn't we pulled up the operations to consider you can see come true. So yes, it's an interesting one for us. The company has been [indiscernible]. So the assets we're working really, really hard to position ourselves there to get money on the way through and also we may do finally sell those assets to recapture as much as we can. So basically s*** situation. We're working really hard to rectify. But as we mentioned, haven't wasted as an opportunity to reset that business.

Yes. I just wondered if they were consistently bad. But clearly, something has just happened recently and caught everyone by surprise.

There are no further questions at this time. I will now hand the call back to Mr. Ian Testrow for closing remarks.

Thanks everyone, for dialing in. Appreciate it. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.