Emeco Holdings Limited (EHL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Emeco Holdings Limited Fiscal Year 2024 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Ian Testrow, Managing Director and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to Emeco's 2024 Financial Year Results Presentation. Thank you for joining us today. I'll run through the investor presentation we lodged on the ASX this morning. and then provide an opportunity for questions at the end. Theresa Mlikota, our CFO, is with me today, and she will cover the more detailed financial aspects of the results and will also be available for questions. As always, before we begin, I'd like to draw your attention to the disclaimer on Slide 2, which covers the usual important information around forward-looking statements. I'll start on Slide 4 with the key business highlights. Emeco delivered a strong financial performance for FY '24, in line with expectations. The business achieved solid growth in operating earnings, margins and cash flow generation. Importantly, our simplified business model following the sale of the underground contracting business means we are now fully focused on our core business, which is equipment rental, supported by our site maintenance services and workshop and component rebuild capability. Operating EBITDA was up 12% to $281 million. Operating EBIT increased 20% to $125 million, and operating NPAT was up 17% to $69 million. Operating free cash flow was up 66% to $87 million with a cash flow conversion of 93%. These results will affect a strong performance across the business. The rental and workshop business has delivered solid earnings growth and the underground business achieved turnaround performance following the restructure of its activities. Rental and workshop revenues were up 10% and 6%, respectively, however, as expected, total revenue down was 6% to $823 million due to the sale of the Pit N Portal underground contract mining business. Pleasingly, this refocus back to our core businesses was a key driver of the strong margin improvement, along with better cost and contract management. We saw an increase in high-margin earnings from rental and a decrease in lower margin earnings from underground contracting. EBITDA margin increased from 29% to 34% and EBIT margin increased from 12% to 15%. Our focus on rental and maintenance core capabilities and our business improvement initiatives will contribute to delivering increased returns over the next 24 months. Strong earnings and cash flow generation underpinned low leverage and increase in return on capital to 15%, demonstrating good progress towards our longer-term target of 20%. Gross fleet utilization averaged 91% for surface rental reflecting continued high levels of activity in the mining sector and positive demand for our equipment. Our growth CapEx program completed during the year is expected to drive earnings growth in FY '25 with all equipment now deployed to projects. The business remains focused on working toward our 2-year target of 20% return on capital and generating increased free cash flow. Slide 6 shows the group safety performance over the last 3 years. Safety remains a key priority for Emeco, and I'm pleased to report that it's improved. Total recordable injury frequency rate, or TRIFR, reduced from 3.2 to 2.8 in 2024. While this was positive, we still have to work to reduce this further. Slide 7 provides an overview of our segment results. I'll provide a high-level overview of our business performance before discussing each segment in more detail over the next few slides. Force continued to deliver solid earnings growth. External revenue was up 6% to $166 million, with EBIT and EBITDA up 29% and 34% to $9.4 million and $15.8 million, respectively. Rental delivered $17 million uplift in EBIT which is driven by ongoing demand for our equipment and improved pricing and cost management. Revenue was up 10% to $545 million with similar growth in EBIT and EBITDA at 13% and 11%, respectively. In FY '24, we successfully transformed our underground business delivering a turnaround performance, which saw EBIT recover from being loss making to reporting a $5.5 million EBIT contribution in FY '24. Slide 8 provides more operational highlights for the surface rental business. With the fleet size of around 750 pieces of equipment and some 500 skilled employees, Emeco is Australia's largest provider of surface rental and site maintenance services. Year-on-year earnings growth was driven by strong utilization, pricing, improved contract management and cost control. Our growth CapEx program was successfully delivered, which will drive further earnings growth in FY '25. The demand outlook for our surface rental business remains positive, underpinned by continued high levels of activity in coal, gold and iron ore. We'll continue to implement our business improvement program to further improve margins. Moving to Emeco underground on Slide 9. We have repositioned our underground operations to be a pure rental business. This aligns with the company's core strengths and capabilities supported by our site maintenance and workshop services. With around 100 items of specialized underground mining equipment, Emeco Underground is Australia's largest underground hard-rock rental business. Our underground workshops have been merged with Force and overhead costs resized to deliver improved returns and margins. Our underground fleet is well suited to all hard-rock commodities. It only represents 10% of our total fleet. While utilization for underground fleet was low with the completion of FY '24 following the closure of a number of nickel mines, we've seen encouraged uptick as we've entered into FY '25. Over to Slide 10 on Force. Force provides Emeco the dual benefits of a capital-light retail earnings and a quality and cost advantage for our surface and underground rental businesses. Internal revenue was up 20% from prior year with the successful delivery of our growth CapEx and rebuild program. External revenue growth was 6%, which is in line with expectations. During the year, Force delivered 128 machine rebuilds. The demand outlook for equipment rebuilds and workshop services is positive, underpinned by continued robust levels of activity in bulk commodities, and gold and customers seeking to extend the life of their equipment. I'd like to hand over to our CFO, Theresa, to run through the financials.

Thanks, Ian, and good morning, everyone. As with our prior presentations, we refer to operating results in our presentation, which are non-IFRS. You'll find a reconciliation to our statutory results in the appendices. Slide 11 summarizes the group profit and loss. Ian summarized the key numbers, so I won't repeat all of these again. The table on the slide provides a first half, second half split as well as a comparison to the prior year's result. This illustrates the impact on both revenue and earnings of the sale of the contracting business in the second half. Margins improved strongly on the back of the change in revenue mix with an increase in higher-margin rental revenue and decrease in lower-margin underground contracting revenue. Overall, we saw margin and earnings growth across all business segments for the year. Operating EBITDA was up 12% to $280.5 million, operating EBIT up 20% to $125.3 million and operating NPAT up 17% to $69.4 million. The focus on cost control and contract management are also drivers of this growth, and we continue to pursue repricing opportunities to counter cost inflation and business improvement opportunities to improve margins. Reductions in absolute costs in key expense categories were driven mainly by the reduction in costs associated with lower margin underground contract mining revenue. Real cost and margin efficiencies were secured in parts and labor, mainly within [ predictive ] maintenance and a switch from subcontracted labor to full-time Emeco employees. Corporate costs are higher, mainly due to the award of short-term incentives. Return on capital also showed a strong improvement from 13% last year to 15% in FY '24. The benefit from growth CapEx deployed during FY '24 won't be fully reflected until FY '25 with ROC expected to strengthen again next year with the benefit of full year earnings from these growth assets as well as lower [ cartridge ] costs associated with their recent deployment. Slide 12, steps through the major cash movements during the year. Free cash flow generation improved significantly during the year, primarily driven by higher earnings and strong cash conversion of 93%. Operating free cash flow increased by $35 million to $87 million. Net sustaining CapEx was the largest cash outflow item at $154.6 million, which was in line with the expectations and in line with depreciation expense for the year. The working capital outflow of $14.2 million was predominantly due to the establishment of new projects in surface rental. Finance costs of $24.8 million were well contained despite higher prevailing interest rates during the period, noting that the FY '23 interest included a $1.6 million withholding tax payment. Growth capital expenditure was in line with expectations. The program included 18 x 793 Ds and 5 x 789 Cs and additional acquired fleet funded $47 million in cash and $12.7 million in lease finance. All growth capital is now deployed into projects with the earnings kick expected in FY '25. The $6.4 million (sic) [ $6.5 million ] dividend and $2.1 million in share buyback payments shown on the chart related to first half FY '24 commitments from the company's capital management program. These comprise $0.0125 per share in fully franked dividends paid and $0.4 million in share buybacks. A further $1.7 million was applied to share buybacks to service the company's employee share plan. The capital management program is currently suspended as we focus on net debt reduction for FY '25 to provide future flexibility for capital management and growth. The other main item I wanted to touch on rounding out our cash expenditure during the year is our ERP program. The design phase of our ERP is now delivered and on budget with a spend of circa $3 million, making up the bulk of the $4.2 million in non-op cash items. As with the prior year, no income tax was paid due to the company's carried forward tax loss position, which was $286 million at 30 June 2024. Moving to the balance sheet summary on Slide 13. The balance sheet remains in a healthy position and continues to provide flexibility to pursue growth, balanced with debt reduction or other capital management opportunities. Emeco's balance sheet strength was also reflected in the upgraded credit ratings over the last 18 months. Moody's upgraded from B1 to Ba3 in January 2024, following on from the upgrade by Fitch in February 2023. The net increase in plant and equipment and right-of-use assets by around $40 million reflects the growth CapEx program I mentioned earlier, which focused on surface rental fleet. Utilization levels across surface fleet averaged 91% for the year, justifying incremental investment in larger-sized, in-demand fleet. The investment program delivered an IRR of around 20%. Net debt increased only marginally in spite of the group's growth CapEx program. Importantly, leverage reduced back to our long-term target of 1, after funding sustaining and growth CapEx for the year as well as capital management initiatives. The AMTN notes of $250 million comprising the bulk of our debt at a fixed interest rate of 6.25% and mature in July 2026. Available liquidity was around $140 million at 30 June, which includes $78 million in cash and an undrawn revolver of $65 million. This is outlined on Slide 15, which shows the maturity profile and liquidity position in a bit more detail. The slide is self-explanatory, and the main thing I wanted to reiterate is that our debt maturity profile and liquidity position provide funding flexibility for growth and other initiatives. I'm happy to talk more to the finances in the Q&A. But for now, I'll hand back over to Ian.

Thanks Theresa. Moving to Slide 17. I'd like to draw your attention to Emeco's competitive advantage. Mid-life rebuild capability and our site-based maintenance services provide our customers industry-leading rental equipment solutions that set us apart from our competitors. As Australia's largest provider of surface and underground equipment with around 850 pieces of equipment in our fleet, supported by our strategically located workshops we positioned to service the Australian mining industry. And almost 1,000 strong workforce provides on-site and workshop capabilities, which enable us to deliver reliable and high-quality rental solutions for our customers. Our scale and engineering capability provide a cost and quality advantage that enables us to provide our customers cost-effective rental equipment while delivering strong returns for our shareholders. Moving on to Slide 18. We're by far Australia's largest provider of surface and underground rental and maintenance services. Our scale and the footprint provide us with a diverse portfolio of earnings with 240 projects and 200 customers across a range of commodities. Slide 19 illustrates Emeco's business strategy. Our core strategy remains unchanged and is simplified down to 3 core pillars to guide our team in growing sustainable and resilient business and creating long-term value for shareholders. These 3 pillars are summarized on this slide, but to reiterate, our strategy is to be Australia's lowest cost, highest quality, technology-driven mining equipment rental business to maintain a balanced and diversified portfolio of projects and to exercise disciplined capital management by targeting 1x leverage, generating strong free cash flow and achieving a 20% ROC target within 2 years. Moving on to Slide 20. Return on capital, along with strong free cash flow, is the key performance metric for the business. ROC increased to 15% in FY '24 from 13% in the prior year. Our focus on our core rental and maintenance services and business improvement initiatives will drive us to achieve our target of 20% ROC over the next 2 years. You will notice that we have color-coded the improvements in accordance with the time line we expect to deliver improved returns. In FY '25, we expect to annualize earnings from our FY '24 growth program to be a major driver of ROC improvement. This will be supported by further expected savings in procurement, labor and R&M expenses. Beyond that, in FY '26, we'll be looking to further increase utilization of our underground rental fleet. If not, we'll downsize the fleet in the future to improve returns. Surface fleet optimization as well as contract renewals are also expected to be drivers of ROC improvements in FY '26. Corporate overhead savings are expected to be delivered from the installation of our new ERP system in FY '26. Improving ROC will have a positive impact on operating free cash flow. And our target ROC of 20% over the next 2 years broadly equates to an operating free cash flow of around $140 million per annum, up from $87 million achieved in FY '24. Slide 21 outlines a brief update on ESG. The Board approved an inaugural ESG strategy in February 2023. Work has commenced to assess and develop our position with respect to Scope 1, 2 and 3 emissions. And our first position statement on climate change has now been published. We are committed to developing technology, which supports the efficient use of our rental fleet by our clients. Finally, Emeco is a people business, at least as much as this equipment business. We continue to invest in training and development of our employees. Slide 23 is our FY '25 priorities and outlook. We're very proud of our FY '24 results and the momentum it's created coming into FY '25. Demand outlook for the business is strong and FY '25 remains positive. An important priority will be to deliver earnings growth and strong returns on the growth capital to invest in our fleet during FY '24. The business will continue to focus on cost efficiencies and contract repricing. Underground rental fleet redeployment and rightsizing will be a priority. We'll also focus on a range of technology initiatives. We're investing in to widen our customer value proposition and increase our competitive advantage. With a positive demand outlook, we expect earnings growth in FY '25 and progress on our pathway to 20% ROC over the next 2 years. Points to note are FY '25 SIB CapEx to be around $160 million to $165 million. Depreciation is expected to be circa $165 million to $170 million. ERP spend is expected to be in the order of around $10 million. Growth CapEx is expected to be minimal as we focus on delivering earnings growth and strong free cash flow in FY '25. I'd like to take this opportunity to acknowledge the efforts of our entire Emeco team in delivering an excellent result in FY '24. I'd also like to thank our customers, suppliers, financiers and the community partners who play a crucial role in our success. With that, I'll hand over for questions.

[Operator Instructions] And the first question will come from [ Shibat Adani ] with [ Arkin Capital ].

Congrats on another great set of numbers. I just at the outset wanted to say, I think it's been about 8 years since we've been on this journey with you, and we continue to be impressed by the effort that you and the rest of the team have put in. So congratulations. Just one quick question from my side, just on your guidance for net debt reduction. It sounds like the combination of lower CapEx, potentially less working capital outflow as the projects that you've commenced start to deliver cash flows. You will be generating a fair amount of cash in FY '25, right? So with one eye on the bond that comes due just past the end of FY '26, can you just help me to understand how you're thinking about dealing with that? Is the intent just to build up cash on the balance sheet to reduce gross leverage at the time of that refinancing?

[ Shibat ], thanks for those kind words at the start. Yes, Shibat, you're right about FY '25. It is about us generating free cash and building cash, absolutely. For me, it's all about creating optionality. Having at the end of FY '25 our cash reserves and how you look at the options in front of us. You're right, we do have a [ refi ] due in FY '26. Our bonds reached end of their term in July 2026. So we'll consider options there. We'll consider options about opportunities that we've created with our mid-life asset model, the returns we get, future growth opportunities. And we'll also consider other capital management options in front of us. So for me, it's all about creating optionality at that point.

Okay. And does some of that optionality include potential inorganic growth? Or are you kind of happy with the returns that you're generating organically. And so that's kind of where the focus is likely to be?

I'm happy with the returns that we're generating organically, Shibat, I see them come through in FY '25 from our investment and growth CapEx in FY '24. You'll actually see even if we don't put any growth capital into the business [ through ] FY '25, you continue to see growth going to FY '26 as we continue to pull business improvement cost levers. We look at some of our business improvement initiatives, repricing some of our contracts. So we are feeling good about the business and our ability to generate organic growth.

Yes. All right. Good luck on your path to 20%. Hopefully, you get there sooner than you expect.

And the next question will come from Sophia Mulligan with Macquarie.

Congratulations on the results. Just two quick questions for me, if I may. Just preparing on the last question [indiscernible]. So I noticed you didn't pay a dividend and you called out focusing on existing debt. Your leverage is where you got quite low and you said that it was at the target range. Is there plan to bring back the dividend?

Yes, we haven't changed our capital management policy. But as per announcements, we do have our capital management on suspension at the moment. We'll continue to do that through FY '25. And as I mentioned to Shibat, building cash, generating strong free cash and then considering our options at the end of FY '25 is absolutely our intent.

Yes. That's helpful. And just on the underground business, the second half exit rate margin, is that fair to look at moving forward?

The margins -- I think the margins will improve in the underground business. I mean we -- there is still a bit of the second half, had some contracting activity in it. So we've stripped and simplified that right back to be a pure rental business now, and we've reduced some overheads and we've put the underground workshop business into force. So yes, you'll see strong margins similar to our rental business coming through in underground from this one.

And the next question will come from Pierre Prentice with Asymmetric Asset Management.

Ian and Theresa, thanks for delivering a really good result. Good to see things back on track. I'd like to ask you about revenue growth going into FY '25. Could you give us a feel for how much is coming from basically industry growth and how much you expect to get from making more inroads into your share of the business being done in it moving from your existing clients or new clients, in other words, market share growth?

Thanks. I appreciate your support. Top line revenue, I think it will be pretty flat. It's particularly when you consider some of the revenue that we're getting from the underground contracting business in the first half of FY '24. So overall, I think it will look pretty flat year-on-year '24 to '25, but you will see earnings growth. As far as revenue generated from our rental business -- our core surface rental business, yes, you'll definitely see growth in revenue from our rental business. I believe that we are really improving and increasing the competitive advantage we have in the market. This mid-life asset model, these core pieces of fleet that we invested in and rebuilt through our facilities and put out to work are performing really, really well. And I think that what you'll find is that the market -- we're generating a lot of value for customers. And I think that we're positioning ourselves really into a very good space, and I think we will capture more and more market share going forward. So as far as where we sit in the industry and in the market, I feel very good about it. I feel like we're adding a lot of value to both the mine owners and also to our contracting friends as well, particularly as they're looking at capital-light options. We are a capital-intensive business, we pride ourselves on that. We pride ourselves from generating a strong return on cash flow from our capital intensive business and providing solutions to others who are looking for more of a capital-light model.

But if you've got a strong competitive advantage and you're offering your clients value, why would top line growth be flat in FY '25?

Top line growth in our rental business, that will be flat in FY '25. Top line growth in our rental business, we will see growth and we will see growth in earnings in the rental business. My reference to the flatness of revenue is the mix. The mix in FY '25 will change versus FY '24 because FY '24, the first half was influenced by the underground contracting business that we sold to our friends at Macmohan's.

Right. Okay. So if we adjust for that, we'll get a feel for what your top line growth will be?

Correct. That's correct. That's 100% correct. Thanks for the clarification.

Okay. The other question is on your corporate overheads, which came in at $51 million this year. That's a 20% increase from last year's figure. And in absolute terms, $51 million is a hell of a lot for a company of your size, 6% of revenue. And it's sort of tracking in the opposite direction of your ambitions regarding EBIT improvement and ROC improvement in the next couple of years. So could you just tell us what's in there? Why it's so high? And where we'll end up in 2026 and beyond?

I'll just talk at a high level here. Look, we've invested in the business. We've invested particularly around our technology side of things and in our ERP as well. But we do expect to get some corporate savings in FY '26, particularly as our ERP is put in place, but I'll let Theresa talk around some of the details.

Yes. The increase in corporate overheads has increased for some very good reasons. The STI has gone up by about $4 million, is a key driver. We've got a couple of non-op items. So the ERP spend for the year is in that number. So -- and the non-op [indiscernible] in our operating result and an increase in LTI. They are the drivers of the increase in the period. We've added a bit of capability, as Ian said, around IT and procurement to push those programs to develop our value proposition to our customers as well as to get the cost savings we're chasing on our procurement program. But the primary drivers of that increase period-to-period as last year we didn't pay much of an STI at all and the LTI and STI expenses are key items in this period.

Sorry, I was going to say I think that explains the increase between years. But where would you like this to land in the long term? Where it sits at the moment? Your corporate overheads are 1/3 of the EBIT, which has been generated before head office. So in other words, your EBIT goes from $150 million to $100 million. Surely, there must be some scope for reducing that. And I'm interested in knowing what your long-term vision for that mine is?

Yes. So our corporate overhead includes our asset management team, which is fairly substantial cost, that's really linked to our operations. So it does look a bit unusual versus, I'll say, a normal overhead, but it does reside in Brisbane, and we treat it as a corporate function that's contained within that number as well. So that would probably account for, I'll say, a bit of the unusualness versus a standard corporate overhead. As Ian said, we've had to crank some of our capabilities to get some foundation work done in some of our capability areas. When we get our new ERP, we should be able to dial back some of that incremental resource when we've got that up and running.

So how much of that is sort of abnormal ERP expenditure?

In this period, it's $3 million.

[Operator Instructions] Our next question will come from Gavin Allen with Euroz Hartleys.

Apologies, I have a few technical issues here, so I might have missed a couple of the questions. Just I'd like your ROIC slide on Page 20. The annualized earnings growth for -- out of 2024 CapEx, self-explanatory, but meaningful if I expect that green bar on there. Just wondering if you could flesh out maybe a little further the procurement program savings you're looking for in terms of flavor and timing of those.

Thanks, Gav. On the procurement program, we had some benefits come into the FY '24 results. So from the 1st of January on our part spend, that will annualize into next year. We have rewritten quite a number of contracts in relation to our whole procurement portfolio. Most of those have been written towards the end of FY '24. So that will come into effect in FY '25. And they are really across all of our spend categories. But we've got -- I'll say, we've got a better deal in relation to our primary part spend with our Caterpillar dealers. That was effective the 1st of January '24, but we only got a half a year of that.

All right. So most of the initiatives have sort of taken place and there to play out over 2025, is that fair?

That's correct. It will take -- it will play out over '25 and build out completely into FY '26.

Yes, absolutely. And just one other one, just in terms of underground, you'd sort of talked about it as one of the objectives to restate and we all understand nickel has been challenging. Just on the numbers, your EBIT improved to 5% on a $112 million worth of revenue, which is a great improvement. But nonetheless, translates to 5% sort of EBIT margin. Your EBIT margin in surface is a lot higher than that as you'd expect. Do we expect to see as you've reset that underground business and kit that those target EBIT margins sort of start to track towards surface? How do we think about that segment with that in mind?

I guess, that's exactly how you should think about, but underground rental business will look like our surface rental business. It's about 10% of our fleet. So it's not overly meaningful, but it is strategically important for us to provide our customers an open-cut underground solution, particularly in hard rock. And you will see similar returns to what you see in surface.

Yes, true. And when we look at the ROIC slide that happens over sort of '25, '26, that reset.

Yes, it's correct. We've got that [ fleet ] in place at the moment. We'll rightsize our fleet through FY '25. We're seeing some pleasing uptick in utilization of our underground fleet. We've pulled all the levers around the costs and overheads and we integrated within our surface rental business. I'm feeling good about underground going forward.

There are no further questions at this time. I'll now hand back to Mr. Testrow for any closing remarks. Please go ahead, sir.

Thank you, and thanks, everyone, for joining in. I just want to thank the team. I just want to reiterate that we've had a really good FY '24. We're really encouraged with the growth in earnings and margins and free cash flow, team working really, really hard and we've really proved up this mid-life asset model as we're investing in equipment, rebuild it for our expertise and put it out to work and doing a great job with it. So I feel great about the business. I feel like I'm surrounded by the strongest team in my tenure that I've had in 9 years as a CEO of Emeco. So feeling really, really good about the momentum going into FY '25 with this simplified business model.

This concludes our conference for today. Thank you for your participation. You may now disconnect.