Emeco Holdings Limited (EHL) Earnings Call Transcript & Summary

Good day, and welcome to the Emeco Holdings Limited 1H '24 Interim Results Briefing. [Operator Instructions] I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Ian Testrow, Managing Director and Chief Executive Officer, to begin the conference. Ian, over to you.

Good morning, everyone, and welcome to Emeco's first half results for the 2024 financial year. Thanks for taking the time to join us today. I'll run through the half year results investor presentation we lodged on the ASX this morning and then provide an opportunity for questions at the end. With me this morning is Theresa Mlikota, our CFO, who will cover the more detailed financial aspects of the result. Before we begin, I'd like to draw your attention to the disclaimer on Slide 2, which covers the usual important information about forward-looking statements. We'll begin with Slide 3 and an overview of the result. Our first half result was a solid performance by our company retaining the strong gains we made in the second half of last year following a challenging first half of last year. Importantly, we also improved return on capital. Safety remains a high priority for Emeco, and we're pleased to report an improvement in TRIFR to 2.6. Additionally, over the half, we delivered on the repositioning of the Pit N Portal business to a higher return rental business model. I'll talk more about this later. The backdrop of our solid financial performance was continually strong levels of mining activity in the sector despite corrections in lithium and nickel prices that have impacted some projects. This was reflected in our steady first half 2024 revenue of $435 million, which is broadly in line with both the first and second half periods last year. We reported EBITDA of $137 million, up 21% on the weaker first half of 2023 and in line with the improved second half 2023 performance. This is also the story for EBIT, which is up 49% on prior corresponding period to $60.7 million and down $3 million on the second half after slightly higher depreciation charges and circa $2 million lower contribution from Pit N Portal. Despite the slightly lower contribution, Pit N Portal continued to deliver the positive EBIT, and performance was in line with our stated expectations. We don't expect the announced scale back of Wyloo projects to have a material impact on our earnings for FY '24. The rental and Force businesses delivered strong operational and financial performance in line with our expectations, and we've seen margins stabilize from improved contract pricing following successive periods of high cost inflation. Return on capital improved to 15% from 13%. We expect this to moderate in the second half once we factor in the investment in growth CapEx for the full year. The business continued to generate good operating free cash flow, which was a healthy $40 million for the half, supporting our CapEx program. Positive cash generation supported our strong balance sheet, where net leverage remains steady, slightly above our 1x EBITDA target. As we've noted in the announcement, the Board has suspended the group's capital management program with a preference for free cash to be used to reduce financing requirements and to achieve leverage at or below 1x EBITDA. The company will develop an updated capital management strategy and revert ahead of the full year. The company's balance sheet remains strong as reflected by recent rating agencies upgrades. Slide 4 provides a snapshot of the key performance numbers. I've touched on these already so I won't go through them in detail. But the slide basically outlines the first half '24 performance compared to both first half '23 and also second half '23. This half year performance was a consolidation of the gains we've made in the second half of last year, which is reflected in the high return on capital, with the rental and workshop businesses continuing their strong performance during the half. Slide 5 illustrates our half year performance track record. A few things I'll call out here, the first is the consistently strong performance the business has delivered over the last few years apart from the first half '23 period which is impacted by Pit N Portal. And also I'd like to highlight the solid free cash flow performance of the business, with the exception of first half '23 which, again, was impacted by the poor performance of Pit N Portal. On Slide 6, we wanted to recap the reset of the Pit N Portal business. During financial year 2023, our focus on restoring Pit N Portal profitability and redressing counterparty risk, which included existing projects and renegotiating rates. The next stage of our reset was to exit underground contracting, and we did this with the transaction we announced with Macmahon in December. I won't go through the transaction details as these are summarized on the slide and were outlined in our ASX announcement. Instead, I want to talk more about the rationale and impacts of the transaction. The underlying rationale is to retain exposure to the underground hard rock mining sector, but refocus Pit N Portal to a rental model, which is aligned to our core capability. The transaction with Macmahon was structured along these lines. We sold the contracting elements, basically the order book, workforce and support equipment and retain the underground fleet to form Emeco Underground. The transaction was also an opportunity to build our relationship with Macmahon and support their capital life growth strategy for a rental agreement that will also drive growth for Emeco. This covers both surface and underground projects. Slide 7 shows our recent safety performance. I'm pleased to say that we saw an improvement in our safety performance with our TRIFR coming back to 2.6 after increases in prior periods. As said, we still have a lot of work to do to improve and get our LTFR back to 0. We say this every reporting period, but safety is our most important priority across the entire Emeco business. On to Slide 8 and the outlook for second half of 2024. Overall, the outlook for the second half remains positive, and we see continued robust levels of customer demand across the Rental and Force businesses. Consistent with this, our investment priorities will remain focused on delivering returns on the growth capital commitments we've made for this year. In addition to this, our operational priorities will focus on the delivery of higher margins, returns and cash from our core rental businesses and workshops. Our [ sustaining ] business CapEx expectations remains unchanged at $160 million for the full year. This is in line with our depreciation charges for the year. We have budgeted a further $6 million of ERP spend in the second half. We expect growth CapEx for the second half of 2024 to remain in line with previous stated expectations, which means around $25 million for the second half. All trucks in the 793D rebuild program are now committed to projects on completion are expected to be in work during the second half. Overall return on capital investments is likely to moderate slightly to around 14% in the second half, reflecting the timing of the spend later in the reporting period. Given the positive demand environment and our focus on internal improvement opportunities, the outlook for each of our business is rental earnings are expected to grow, driven predominantly by high fleet utilization and fleet growth; Force earnings could be slightly down as we dedicate a lot of our resources to internal works to rebuild the 793D fleet; Emeco Underground earnings are now expected to be marginally lower than first half '24 with Wyloo projects being placed in the care and maintenance on the 31st of May 2024. Balance sheet leverage is targeted to be at or below 1x operating EBITDA. In the financial year 2020, the business plans to limit its growth CapEx program. We have a very strong focus on delivering improvements to our core rental business, and we expect to see the full benefit to our FY '24 growth CapEx and cost savings programs, delivering increased margins and returns and improved operating free cash flow. Jumping to Slide 10. I'll provide a few comments on each of our businesses and our outlook before handing over to Theresa for the financials. Our core rental business makes up the majority of revenue and earnings. This has continued to underpin the company. Revenue was just under $260 million, which is an increase of 11% on first half '23 and steady on the second half '23. This was driven by continuing strong demand across all of our fleet categories. Rental earnings was also strong with operating EBITDA just a touch under $140 million, an increase of 13% on prior corresponding period; and operating EBIT of $76 million, an 18% increase on prior corresponding period. Margins stabilized in the first half on the back of contract repricing. This was partially offset by higher depreciation charges from cost inflation and asset replacements. The outlook for rental demand is positive supported by robust industry production outlook for bulks and gold. The second half is expected to deliver earnings growth on the back of growth capital investment, which includes the deployment of the rebuilt 793D fleet. We expect margins to improve through pricing and business improvement initiatives targeting cost savings. Over to Slide 11 on Force. Force continues to deliver capital-light returns for the business as a key and trusted provider of high-quality rebuild and workshop services to the mining sector. More importantly, Force provides our rental business a competitive and cost and quality advantage that is crucial to the excess of our midlife asset model. Operating EBITDA and EBIT for the segment were both up strongly compared to the first half of 2023, with operating EBITDA for the first half '24 at $8.6 million and operating EBIT at $5.7 million demonstrating that Force is a meaningful contributor to the overall group earnings. The internal rebuild programs continue to grow, driven by strong demand from the rental business. Second half revenue will be driven by internal demand from the rental business for the delivery of the 793D rebuild program. Further cost efficiencies are expected to be extracted by consolidating workshop facilities with the Emeco Underground business. Slide 12 outlines the performance of Pit N Portal. In summary, Pit N Portal earnings were in line with expectations. The segment delivered a strong turnaround in performance in the second half '23 as we exited underperforming contracts, renegotiated rates with clients and reduced costs. This performance was largely maintained in the first half of 2024. We reported an operating EBITDA of $12.1 million with an EBIT of $3.7 million, with margins improving, albeit off a lower revenue base. The sale of Pit N Portal's contract mining projects to Macmahon will provide the foundation for a return to our traditional rental model with expected improvements in earnings and returns. The announced placement in the care and maintenance of Wyloo's northern operations and Durkin projects are not expected to have a material impact on the second half 2024 earnings. Nickel projects represent approximately 4% of Emeco's FY '24 earnings, and the equipment redeployment opportunities are currently being explored for fleet coming off Wyloo's nickel projects. I would like now to hand over to Theresa and will join again prior to the Q&A.

Thank you, Ian, and good morning, everyone. Just a reminder that the presentation refers to operating results. You can find a reconciliation to our statutory results in the appendices at the back of the presentation. Slide 14 summarizes the group profit for the half. Ian mentioned that the results for the half consolidated the strong gains we made in the second half of last year following a challenging first half in '23. You can see this in the P&L table, particularly with margins. Margins held even with slightly lower revenue levels following PNP contract terminations late in FY '23. Operating EBITDA and operating EBIT reflected strong performances across each business segment with the reduction in EBIT compared to last half of FY '23 being in line with lower PNP earnings expectations and increased depreciation guidance. It's worth noting that whilst there has been a reported reduction in operating NPAT compared to the last half, the second half of '23 included a tax loss write-back of around $5 million. The earnings turnaround over the last 12 months has flowed through to the improved return on capital. We expect this to moderate slightly in the second half following the completion of our growth CapEx program but to then improve in FY '25 once we get the full run rate of earnings from this investment. The waterfall chart on Slide 15 breaks down the cash flow generation for the half. Cash conversion remained strong at 94% and is based on the statutory EBITDA conversion to cash flow from operations. Free cash flow generation was $40 million, representing back-to-back half-on-half positive cash flow generation, driven by disciplined credit management, improved rental and workshop earnings and the PNP contract resets. Net sustaining CapEx was $77.6 million, which was largely in line with depreciation and was fully funded from operating cash flow. We expect a similar level of sustaining CapEx in the second half. Growth CapEx was $22.8 million and includes upfront payment for the 793D fleet currently being rebuilt. Lease drawdowns included $12.7 million to fund growth capital. Total growth CapEx for the year, including that funded under leasing is expected to be around $60 million, all of which will be deployed during the second half. The growth CapEx program focuses on core rental fleet with an IRR around 20%. Rental fleet utilization levels remained high at 92%, justifying incremental investment in larger sized in-demand fleet. The 3-year ERP upgrade project commenced with a design phase spend of $2 million. An additional spend of circa $6 million is expected in the second half as we progress into development and implementation. Capital management outflows were $7 million and related to the payment of the final FY '23 dividend and $0.4 million in share buybacks. As Ian explained earlier, the Board have elected to suspend the group's capital management program with focusing free cash flow on reducing the company's financing requirements. No income taxes paid due to the carried forward tax loss position, which is $318 million at 31 December 2023. Slide 16 provides a summary of the balance sheet. This remains strong with net leverage just above our 1x EBITDA target after funding capital expenditure and capital management initiatives. Our focus will be on reducing leverage to be at or below 1x as we approach refinancing of the group's facilities. Receivables reduced in line with improved credit management with payables broadly in line with 30 June. Net debt was up slightly to $290 million from $276 million. This was supported by improved earnings levels, resulting in net leverage improving slightly from 1.1x at 30 June to 1.06x at 31 December. Credit ratings upgrades over the last year reflect the company's solid balance sheet and cash flow generation with Moody's upgrading from B1 to Ba3 in January 24 and Fitch upgrading to BB- in February '23. Finally, Slide 17 provides a snapshot of our debt maturity profile and liquidity position. The main thing to note on the maturity profile is the $250 million of Australian medium-term notes which have a fixed interest rate of 6.25% and mature in July 2026. Liquidity was just under $140 million at 31 December '23 including $64.5 million in cash and $75 million in undrawn revolving credit facilities. With that, I'll hand back to Ian, and I'm happy to answer any questions and provide any more information where I can in the Q&A session.

Thanks, Theresa. And now on to Slide 19. Our strategy continues to underpin Emeco's results. Each of the 4 pillars provide clear accountability, alignment and structure to drive growth and build a sustainable and resilient business that generates long-term value for our shareholders. For the sale of the Pit N portal contracts, we've reset the return profile of the business while maintaining our balanced and diversified portfolio. The partnership with Macmahon provides a growth channel in open cut and underground operations. Additionally, as Theresa touched on, we've maintained a healthy balance sheet and achieved improved ratings from both Moody's in January 2024 and previously noted increase from Fitch in February 2023. Emeco continues to see strong customer demand with significant increases in our workflows at Force and strong demand for all of categories of our rental equipment. Our offering continues to resonate with customers as a best-in-class provider of mining rental fleets with well-located operation capabilities. Moving to Slide 20 and Emeco's competitive advantage. We are focused on our core offerings of rental and maintenance and leveraging our extensive expertise in these areas to drive growth and deliver value for our customers. Our rental offering, which spans both surface and underground, provides an extensive fleet of almost 900 pieces of equipment, along with sought-after rebuild and maintenance services from our Force and Emeco underground workshops. We have the national scale across the East and West Coast to service our customers, a cost and quality advantage and the asset management expertise and in-house capability to maintain our fleet, providing a full service offering to our customers. Our workshops provide cost and quality advantage, which enhance our fleet utilization. We have 9 workshops across Australia, which are the backbone of our operations since we built our business around what we call our midlife asset model. This business model allows us to source and rebuild machines and refurbish them at significantly lower cost than new assets, and this drives our industry-leading returns in rental. Turning to Slide 22 and the focus on operational priorities for calendar year 2024. These priorities expand and will be outlined in our FY '23 results. For our core business, we remain focused on driving the performance of our core rental and Force businesses. Our FY '24 growth CapEx program targets a 20% IRR and we'll continue to focus on cost efficiencies and contract pricing to drive margins and returns. Strong returns and free cash flow generated for disciplined capital management remain our primary focus. Business improvement initiatives, targeting cost savings and contract repricing will also be a key focus over the next 12 months. These improvements encompass the core drivers of value and will be key to improving margins and returns across the business. We'll continue to expand on our technology initiatives, which enhance our value proposition and grow our customer base. In particular, we'll expand our EOS customer base, especially with our carbon module, which allows customers to monitor and manage emissions data in real time. We're also working on expanding our real-time component monitoring capability for EOS and predictive maintenance capability. We'll make the necessary investments in our ERP project which is currently in the design phase with the build to commence later in 2024. The company also released its position statement on climate change over the next 12 months. Turning to Slide 23 on our investment highlights. To put it simply, we're Australia's largest mining equipment rental provider. We are focused on providing strong returns and free cash flow. We have the scale and expertise to deliver cost and quality to our customers. We are well diversified by customer project and commodity. We have a strong balance sheet. And we have a positive macro thematic within the equipment industry. Finally, I'd like to acknowledge the dedication of our entire Emeco team whose commitment to delivering high-quality equipment solutions to our customers is unwavering. We also express gratitude to our customers, suppliers, financiers and community partners who play a crucial role in our success. In conclusion, we're confident our business model will enable us to deliver sustainable growth and increase shareholder returns over the remainder of FY '24. Thank you for your ongoing support. With that, I'll hand over for questions.

[Operator Instructions] And your first question comes from the line of Henry Copley of Jefferies.

Just a question on the now qualitative guidance, I was wondering if you could give an indication if you're happy with consensus EBITDA at about $280 million for the full financial year.

Yes, we're comfortable with consensus.

Okay. Great. And then also just for Force group, I saw that had another record period. Could you just talk to the demand environment for parts and rebuilds, please?

Yes. Our Force business has done particularly well. You see significant growth in the revenue of our business over the past two halves, the team providing quality service to our customers, and just as importantly, providing our Rental business, a quality and a cost competitive advantage. So that business is in high demand, so it's a very capable and strong business.

[Operator Instructions] And your next question comes from the line of Cameron Bell from Canaccord.

I just wanted to follow up on Henry's question just then. So he highlighted that $280 million EBITDA consensus. So that was pre the announcement around Pit N Portal divestment. Are you saying you're happy with that number remaining as a consensus number, $280 million even with the divestment of Pit N Portal? Or should we adjust it to Pit N Portal?

No, it's correct, Cam. Taking into account the divestment of Pit N Portal.

[Operator Instructions] Your next question comes from the line of Mitch Sonogan from Macquarie.

Just a quick one. And if you don't mind just providing a little bit of color about what you're seeing, I guess, in the rental markets on the east and west. Obviously, you've talked to expecting that growth half-on-half. But yes, good just to get a general update on how you're seeing overall conditions within the business and the end customers?

Thanks, Mitch. Business is -- the rental business is performing well. Demand is strong. East Coast, we've made the decision to bring those coals over from South Africa and place them into MacKay. I was at MacKay last week and couldn't be happier with the way the team are going, rebuilding those -- that equipment. It's going out to a project. So East Coast is performing well. In the Western region, we're not exposed to the battery metals in our rental business. So the business is performing well, and we consider it to be steady half-on-half. So overall, I'm really happy with the way of the team and managing the business.

Yes. And that was actually going to be the next question. I guess, just from a commodity perspective, there has been a fair bit of noise in the battery minerals, et cetera. But yes, [indiscernible] giving a bit of an update on some of the key commodities. And I guess, over on the East Coast, [ coal ] are always interesting. So [ you're seeing ] demand in the outlook in those different key commodities.

Yes, coal strong for us on the East Coast. Gold strong for us. If you look at our business and our commodity portfolio, I think our exposure to the battery minerals is 4% nickel for earnings for FY '24. So that's pretty minimal. We're mainly in the bulks and gold. We're seeing ongoing strong demand.

Okay. And maybe just a quick one for Theresa. Obviously, there's the comment there just in terms of the overall growth CapEx at this point in time expected to moderate into FY '25. So here, maybe just a bit of an update on how you're thinking about free cash flow generation? And I guess that ties in to the update for a capital -- new capital management program by the end of this financial year.

Yes, Mitch, I'll just touch on that firstly at a high level. The growth CapEx is going well. We'll put that to work this year. I think that the overall message from management and the Board is that we are 2 years away from a refinance. We're obviously in a different yield market than the last time we did a refinance. So our focus will be very much around generating strong returns, improving our margins and generating strong cash as we get our balance sheet. So really nice and tight for this refinance in a couple of years.

Yes. I think as Ian said, this is probably the last tranche of growth CapEx for about 12 months. And our focus is really on improving the quality of the earnings and doing that organically. So you're trying to get more operational free cash flow into the equation so that we can deliver higher returns to our shareholders.

And that's the beauty of the conversion of Pit N Port into Emeco Underground, Theresa, so we can really focus on our core competency and what we do best.

Yes.

Sorry, just -- while I've got you there, Theresa as well. Just on the D&A expected expense in the second half. Should we be expecting something pretty flat at that $76 million? And pretty similar question just on the net finance costs. Should we be expecting something pretty similar in the second half as well?

Yes. On depreciation, we've guided that at $160 million for the year, so a little bit up in the second half. And in relation to financing costs, yes, about the same.

[Operator Instructions] As there are no further questions at this time. I'd like to hand the call back to Ian.

Okay. Thanks very much. Thanks, everyone, for dialing in and to our employees that dialed in, I appreciate it. Great work. Thanks very much.

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