Emeco Holdings Limited (EOHDF) Earnings Call Transcript & Summary

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

Good morning, everyone, and welcome to Emeco's FY '25 Results Presentation. Thank you for joining us today. As per our usual format, I'll run through the investor presentation we lodged on the ASX this morning and then provide an opportunity for some 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. 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. We'll begin on Slide 5 with the key business highlights and an overview of the result. Emeco delivered another year of strong earnings growth in FY '25. All the key financial metrics you see in the slide improved year-on-year. Strong margin growth, cash generation and continued improvement in ROC highlight the resilience of our business model and the quality of the FY '25 financial result. Revenue increased by a robust 7% to $785 million. Both rental and Force contributed to higher revenue, supported by increased demand for our fully maintained rental model and expanded workshop services. Importantly, key contract extensions were executed with a range of customers, extending long-standing relationships and providing ongoing revenue certainty. Operating EBITDA was up 7% to $301 million. Operating EBIT increased 16% to $146 million, and these strong results flow through to a 22% increase in operating net profit after tax to $84 million. Strong margin improvement was a key feature of the FY '25 result with operating EBITDA margin up from 34% to 38% and operating EBIT margin up from 15% to 19%. This improvement was driven through disciplined cost and capital management. A focus on cost efficiency through parts procurement, tighter management of repairs and maintenance costs and overheads and a reduction in the use of some contracted labor were key drivers of improved cost. An improved focus on contract management also contributed to higher margins. Utilization levels remained robust during the year. The surface fleet, which is the bulk of our equipment, averaged utilization of 85% for the year. Underground utilization averaged 57% for the year. Our continued focus on prudent capital management and free cash flow generation supported a strengthening of our balance sheet with leverage reducing to 0.65x from 1x last year. Operating free cash flow was up 32% to $114 million and cash flow conversion remained high at 97%. Return on capital increased to 17% in FY '25, up from 15% in the prior year, demonstrating continued positive progress towards our longer-term ROC target of 20%. Emeco creates a competitive advantage for our ability to cost effectively rebuild mid-life equipment and provide customers with a fully maintained rental solution. Our competitive advantage, strong market position and focus on business improvement have allowed us to deliver significantly improved returns. Moving on to Slide 6 that shows Emeco's half-on-half performance history for the last 3 years. This slide shows steady and consistent half-on-half improvement in all key metrics. The main points I would like to highlight are the significant improvements in cash generation and returns. Free cash flow has increased significantly since first half of '23 and has consistently improved in the last 4 consecutive half-on-half periods. Margins have shown strong improvement, increasing around 1,000 basis points over the same period. These returns have been achieved with only modest investment in growth CapEx, which has supported the improvement in return on capital from 13% in FY '23 to 17% in FY '25. The improvement in cash returns has been reflected in a significant deleveraging of Emeco's balance sheet over the period. Net leverage has improved dramatically across the same comparative period, improving from 1.16x in the first half of '23 to 0.65x in the second half of '25. Slide 8 shows the group's safety performance over the last 5 years. Safety remains a key priority for Emeco and all of our employees. The group reported no lost time injuries for the period. However, the total recordable injury frequency rate increased from 2.8 recorded in June '24 to 3.4 as of June 2025. We'll be working hard to reverse this trend through a greater focus on compliance to our safety systems and processes. Emeco remains committed to providing a healthy and safe workplace. The safety of our people is paramount. The slide outlines a number of focus areas in the company's HSET strategic plan. I won't go through the full list, but many of the areas include continued investment in ongoing training. Training programs for employees and onboarding programs for our contractors remain central to our safety efforts. Slide 9 outlines the key highlights for our rental business in FY '25. Emeco is Australia's largest provider of surface underground rental equipment and maintenance services to the mining sector. We have a fleet of over 840 pieces of equipment supported by our skilled workforce. Rental revenue grew by 9% to $615 million, driven by an increased number of our fully maintained projects and higher underground utilization levels. We continue to see solid demand for all our equipment categories. Utilization levels remain robust with surface averaging 85% for the year. The smaller underground business averaged 57%. However, new projects secured increased utilization levels towards the end of the period. The current run rate is 65% for underground equipment. Operating EBITDA was up 6% to $328 million and operating EBIT was up 11%. The solid earnings growth was driven by a strong focus on both cost management and contract management. In terms of outlook, the rental business is well positioned on cost, quality and fleet capacity to secure new projects with a robust pipeline of opportunities in both open cut and underground. Over to Slide 10 on Force. Force provides an important competitive advantage to Emeco by delivering cost-efficient rebuild equipment for our rental business. Force has 7 strategically located workshops and over 400 skilled employees. External revenue in FY '25 was up 2% to $170 million. 137 machine rebuilds were delivered during the year with a number of new customer contracts secured. This compares with 128 rebuilds completed last year. Earnings were slightly lower with operating EBITDA down $0.4 million to $15.4 million and EBIT was down $1.1 million to $8.3 million. This was due to a reduction in high-margin rebuild works for external customers compared to FY '24. Overhead reductions assisted to mitigate this impact and underground maintenance workshops have been fully integrated with the Force workshops. In terms of outlook, business development activities will be focused on growth on the East Coast and underground equipment rebuilds. Opportunities to expand the service offering continue to be pursued to enhance infield workshop capabilities for battery-powered fleet. An agreement with XCMG was secured to provide Fortescue with maintenance services for a recently purchased battery-powered fleet. The electrification of Australian mining fleet is expected to gain momentum over the coming years as the industry works to reduce its carbon emissions, and we are positioning Force to be a leading market participant. I'd like now to hand over to 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 today, which are non-IFRS. You'll find a reconciliation to our statutory results in the appendices. Slide 12 summarizes the group profit and loss. Ian has already taken us through the key full year financial numbers, so I will focus on -- more on the half-on-half performance. You can see from the table that the second half of FY '25 continued the positive momentum from the first half result with stronger performance across the P&L. While revenue growth for FY '25 was 7%, excluding the now discontinued contract mining, second half revenue grew by 3% to report just under $400 million. At this run rate, we are closely approaching full replacement of the revenue from the underground contracts sold in FY '24, which totaled $91 million. Revenue growth in the first half was driven by growth contracts in both surface and underground and second half growth was aided by improved contract management and additional underground projects. This growth has delivered significantly increased earnings with margin expansion. This again demonstrates the resilience of our business model and benefits of our business simplification. Operating EBITDA was up 7%, operating EBIT up 16% and operating NPAT up 22% on FY '24. Half-on-half, we achieved stronger second half earnings growth due to the full benefit of cost-outs performed in the first half and improved contract management. Margins improved significantly year-on-year with EBITDA margin increasing from 34% to 38% and EBIT margin increasing from 15% to 19%. Notably, our second half EBITDA margin is 39%. This was driven by our focus on operational and overhead cost management and improvement in contract management. This was also the case for return on capital, which was up 170 basis points on FY '24 to 17%. Again, the second half run rate was stronger at 18%. This is tracking positively towards our longer-term target of 20%. Slide 13 steps through the major cash movements during the year. Operating free cash flow generation was 32% higher year-on-year, another strong improvement driven by the continued growth in earnings and maintaining a high cash conversion of 97%. Operating free cash flow increased by $27.4 million to $114.3 million. Importantly, we saw strong half-on-half improvements in operating free cash flow, increasing from $49 million in the first half to $65 million in the second. Working capital investment and finance costs were broadly in line with FY '24 with the increase in working capital driven by the increase in closing revenue run rates period-to-period. Net sustaining CapEx of $149.2 million was $5.2 million lower than last year, which was again in line with expectations. There was no growth capital expenditure during the year. The capital management program remains suspended as we continue to focus on net debt reduction, where we have made significant progress with $56.5 million of operating free cash flow applied to lease and loan repayments in FY '25. Nonoperating cash expenditure of $9.7 million related primarily to investment in our ERP program, which totaled $6.4 million and restructuring costs of $3.3 million related to redundancies generated from our overhead and cost reduction program. As with the prior year, no income tax was paid due to the utilization of carried forward tax losses, which now stand at $75 million at 30 June 2025. Moving to the balance sheet summary on Slide 14. The benefits of the suspended capital management program and the focus on debt repayment can be seen with continued strengthening of the balance sheet. Net debt was reduced by around $86 million to around $195 million with net leverage improving to 0.65x from 1x in FY '24. Other balance sheet movements worth noting, $10 million of the increase in fixed assets was driven by the assets received as consideration for the settlement of the sale of underground contracts to Macmahon. The balance of the increase was driven by CapEx pre-disposals being marginally higher than depreciation. Overall, working capital more than halved to $18 million from $41.6 million in the prior year, driven mainly by the utilization of tax losses to offset taxes which would otherwise be payable. Cash on hand increased by $48.1 million to close the year at $126.4 million and available liquidity was $220 million, including $95 million in undrawn revolving credit, which matures in December 2025. The AMTN Aussie dollar notes of $250 million have a fixed interest rate of 6.25% and mature next year in July 2026. The company is progressing a range of refinancing options and is well positioned to renew or replace these facilities in the first half of FY '26 with a favorable interest rate outlook and a supportive credit ratings from Moody's and Fitch. The balance sheet is in a healthy position and continues to provide flexibility to pursue growth or further debt reduction or capital management opportunities. Slide 15 shows the maturity profile and the liquidity position in a bit more detail. The slide is self-explanatory with the main debt maturity coming up being the AMTN notes and the undrawn revolving credit facility. With an expected successful refinancing, the company's liquidity position will provide good funding flexibility options. I'm happy to talk more to the finances in the Q&A, but for now, I'll hand it back to Ian.

Thanks, Theresa. Moving to Slide 17 on our scale and competitive advantage. I think it's important to recap on Emeco's competitive advantage where it's centered on our scale and integrated service offering. The key elements of our competitive advantage include our capability to cost effectively rebuild mid-life equipment and refurbish our components. Our ability to deliver a fully maintained rental model provides equipment availability certainty for our customers and differentiates us from our competitors. Our asset management and equipment reliability, expertise and technology and a comprehensive fleet of around 840 pieces of surface and underground mining equipment. These are for our national footprint of 7 workshops and field service units across Australia and a skilled workforce of around 900 employees. This allows Emeco to provide industry-leading cost-effective rental services to an extensive customer base, which is diversified by region and commodity exposure. All of these elements are critical to Emeco in providing industry-leading, low-cost, superior quality rental services for our customers and strong returns to our shareholders. Over to Slide 18. I want to close out my discussion on Emeco's competitive advantage with some points on how we use technology. Our technological capabilities form an important part of Emeco's competitive advantage, particularly in today's increasingly data-driven business environment. Firstly, Emeco continues to invest in digital systems and automation across the business to drive operational efficiency. You can see this for our major ERP upgrade, but also for things like standardizing work practices, enhancing field productivity and improving data integrity and reporting. We made significant progress in FY '25 in reducing costs and improving productivity, and we expect our investment in digital systems will continue to drive improvements in efficiency across the business. Secondly, Emeco leverages operational technology to deliver reliable and high-performance mid-life asset solutions to our customers. We integrate our internal operation data such as machine telemetry, condition monitoring and centralized asset management services. This enables real-time diagnostic, predictive maintenance and asset protection. Finally, we have an external-facing technology solutions that enable our customers to better manage their on-site fleets and reduce emissions. Slide 19 provides some additional context around Emeco's customer and revenue profile. The main points I want to call out are, Emeco has very long-term customer relationships. This is particularly the case for our fully maintained projects we provide customers the most value and generate our strongest returns. Our revenue is appropriately diversified across division, customer and commodity, and the large majority of our revenue comes from blue chip and insured clients. Slide 20 illustrates Emeco's business strategy. Our core strategy remains unchanged and is simplified down to 3 core pillars that guide our team in growing a sustainable and resilient business and creating long-term value for customers and shareholders. These pillars are summarized on this slide, but to reiterate, they are to be Australia's lowest cost, highest quality mining equipment rental provider to maintain a balanced and diversified portfolio and to exercise disciplined capital management by targeting 1x leverage, generating free cash flow and working towards our 20% ROC target. Moving to Slide 21. This slide shows our progress towards the key metric of our business, our long-term return on capital target of 20%. ROC increased to 17% in FY '25, up from 15% in the prior year. As mentioned earlier, ROC in the second half of the year was 18%, so our run rate has continued to show improvement. Increasing utilization from the existing fleet will be the main driver of improved returns going forward. Surface averaged 85% utilization during FY '25 and underground averaged 57%. So considerable capacity to grow earnings and improve returns without the need to invest growth capital. Importantly, improving ROC will have a significant positive impact on operating free cash flow, and our target ROC of 20% equates to an operating free cash flow of around $140 million, a significant increase in what the business achieved in FY '25. Slide 22 outlines a brief update on ESG. Our climate change position statement is now published on Emeco's website, and our ESG strategy continues to evolve. We've now developed our position with regard to Scope 1 and 2 emissions reporting and are focusing on developing our reporting methodologies for Scope 3 emissions. Climate-related financial disclosures, gap analysis and our alignment road map have been progressing and expected to be finalized ahead of legislative changes commencing in FY '26. Slide 24 lists our FY '26 priorities and outlook. In our core rental business, the first priority will be to drive increased utilization with an emphasis on increasing our portfolio of fully maintained rental projects where we deliver the most value to our customers, achieve the highest return and secure the longest tenure. This is the primary lever to achieve our long-term ROC target of 20%, and we'll have a renewed focus on business development activities. We'll also continue to focus on disciplined capital expenditure and cost efficiencies to drive returns and cash flow. I talked about our technology capabilities earlier, and we'll continue to focus on completing the implementation of our ERP and digitization initiatives to drive operational efficiency. I also outlined our ESG and safety programs, and we'll continue to progress these. In first half of '26, we'll focus on refinancing the group's debt facilities, which we are well positioned to deliver. Specific areas of guidance at this time are outlined in the slide and include moderate earnings growth, significant free cash flow and substantial further deleveraging. FY '26 SIB CapEx is expected to be circa $170 million to $175 million, $155 million to $160 million net of asset disposals, new growth CapEx. FY '26 depreciation expected to be circa $160 million to $165 million. FY '26 ERP spend expected to be in the order of $6 million. Turning to our closing Slide 26 on our investment highlights. You've seen this before, but I want to highlight these again to emphasize our competitive advantage. We are Australia's largest mining equipment rental provider. We're focused on providing strong returns and free cash flow. We have the scale and expertise to deliver cost and quality to our customers. Our fully maintained rental solutions to provide customers maximum value while creating a clear competitive advantage. We are well diversified by customer, project and commodity. We have a strong balance sheet and low leverage, and we have a positive macro thematic within the equipment industry. Constant and continued execution of our strategy will enable us to deliver reliable earnings and returns for our shareholders. I'd like to take this opportunity to acknowledge the efforts of our entire Emeco team in delivering a strong result in FY '25 with significant improvements across the business. I would also like to thank our customers, suppliers, financiers and community partners who play a crucial role in our success. With that, I'll hand over for questions.

[Operator Instructions] And our first question will come from Mitchell Sonogan with Macquarie.

Can you hear me?

Yes.

Congratulations on a strong result there. Good to see the margins coming up and a good result in some tough conditions there. I guess on that, just on the second half run rate, when we think about looking into FY '26, is that a better indication of where the business is tracking in terms of second half '25? But also, can you maybe just touch on how much of a headwind some of this wet weather was through the second half as well that we've had across the East Coast?

Yes. Look, I think that you're absolutely right to think about the business going forward, the second half projected for. I think that's a fair assumption, Mitch. Yes. Look, one thing I'm really proud of, Mitch, is the management team really doing a cracking job. My 10 years of being CEO, I think this is the strongest team that we've had. All the pieces seem to be in the right positions and really performing well. So yes, it was a tough second half for weather conditions, but our ability to manage through that and hit the result, I'm really proud of and to see those margins improve just shows that we've got a lot of operating leverage in this business. We get those utilization numbers up. We're really, really well placed with this business, particularly with a bit of capacity there. So I'm excited at the progress we've made in the last couple of years. I think we've told the market that we're going to improve our free cash flow, improve our margins and delever. And if you look at Slide 21, just half on half-on-half, for the last 5 to 6 halves, we've really delivered. So yes, I'm very, very proud of the result and very proud of the team.