LGI Limited (LGI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to LGI's First Half FY '25 Results Webinar. My name is Sam Wells from NWR, and joining me from LGI today is CEO, Jarryd Doran; and CFO, Dean Wilkinson. Following a brief summary of the results released to the ASX this morning, investors and research analysts will have the opportunity to ask questions. [Operator Instructions] Thank you, and over to you, Jarryd.

Thank you very much, Sam. Good morning to everyone. So we do like to start off with this particular slide. For anyone that's unfamiliar with LGI, we find that the diagram up on the top right is a really good diagrammatic representation of the end-to-end solutions that LGI offers from the design and installation of extraction systems in landfill to recover biogas through to the bespoke landfill gas flares that we design and manufacture ourselves, the power stations that we design, build and operate through to our battery installations and then encompassing the whole system with our DACS platform to maximize the value extraction. And that really puts us in a strong position because the business ends up having these 3 distinct revenue sources from infrastructure site management through to ACCUs and LGCs and also renewable energy. So we'll take you through some of the details of our first half results. So starting off with our biogas recovery rates, and our team has had absolute laser focus on chasing the gas across the first half, and we see this with a 5% increase in our recovered biogas. The beauty of it is with the more biogas that we recover, the more ACCUs that we create. And so, we have seen also a 7% increase in the overall volume of ACC units across the first half. These 2 items here have driven a nice increase in our revenue as well. And so, our revenue is actually up by 5%, and we've had a 3% increase in our EBITDA and a 7% decrease in our EBIT line. I'll just draw your attention to the chart in the bottom right because this is a very important one, recognizing the growth phase the business is in right now, in particular, showing that our percentage of revenue relative to our CapEx is quite high or our CapEx -- sorry, to revenue is quite high. And it is above the rate of when you look at the revenue relative to depreciation and amortization. Again, it just shows that the business is genuinely in a growth phase, and Dean will talk to a bit more detail around what that means for business. Now our map slide is always great because we're proud to sort of talk to what's changed from half to half. Now across the last 6-month period, the business development team has been extremely busy doing an amazing job securing some new landfill gas rights. And we've actually landed 5 new contracts, which provides us with access to up to 7 additional sites. These cover areas from Lithgow in New South Wales, Southern Downs in Queensland, Midcoast on the New South Wales Coastline, Western Downs in Queensland. And we're currently working through the final condition precedents of these particular contracts and the CER registration before we finalize an investment case. But also, over the same 6-month half, we've managed to secure the Grafton site with Clarence Valley Council. What's really exciting about this particular contract is we have been able to roll that from an operation and maintenance agreement into a long-term landfill gas rights, where LGI can expand the system, get the bulk of the benefit through the ACCUs, which we'll see flowing into the second half. But the fact that we were already working with the council, we were successful in a competitive tender process has meant that our team has been able to move very quickly on to the site and start that expansion work, which is great. I'll lead over to Dean now for the financial results.

Great. Thank you, Jarryd. So you can see on the financial results, our revenue is up 5.4%. That's off the back of increased production, both of our ACCUs and of our megawatt hours. That was off the back of increased gas price, which Jarryd has already talked about. EBITDA growth of 3%, still with a very healthy margin of 46.7% for our EBITDA margin. An increase in depreciation has had an effect on our EBIT line and an increase in our borrowing costs has had an effect on our NPAT line. So those 2 decreasing across the period. So with revenue, I'll talk about the revenue split first. So you'll see that the revenue split has now sort of skewed a little bit more towards ACCUs. There's a couple of reasons for that for this particular half. First of all, we actually had an increase in volume. So we've had 2 sites come online for creating ACCUs for the period. That's our Tumut site and Esk site. And so, the guys have got those up and running for the 6 months. As well as that, we've also sort of chased the gas, as Jarryd mentioned, and so we've got increased gas flows on other sites. So those 2 factors have contributed to the volume of ACCUs increasing for the period. We've also seen some of the highest pricing for ACCUs for the last couple of years occur in the last 6 months. And so, the combination of both the increased pricing and the increased volume have led the ACCU portion of our revenue to be a lot higher than it has been in the past. We expect that to actually correct by the time we get to full year. When I say correct, ACCU volume was still and revenues to be quite high. But what we'll see is electricity revenue actually increasing in the second half. The reason for that is we've had our Mugga Lane installation and commissioning now completed. And so, for the second half of the year, we'll get a full 6 months of that higher megawatt hour production from our Canberra site. So we should expect to see that sort of normalize across the next 6 months. So with the electricity segment, so those increasing gas flows that we talked about have led to increase in megawatt hours. The other contributor to the increase in megawatt hours is the commissioning of Mugga Lane. So the site was actually commissioned -- first started getting commissioned in November. I say that because that's when the connection to the grid was commissioned. We've then gone through a series of processes to connect and commission each of the new generators that are going into the grid. So there has been some megawatt hour contribution in terms of that November and December period from our Canberra site. However, the main increase in the megawatt hours is off the back of the gas flows. Those electricity forward prices, as you can see in the chart on the bottom right, they still remain, as they have been for quite some time for the last couple of years, still sitting about the $100 mark for Queensland, $110, $120 mark for New South Wales, and we expect those forward prices to continue into the future at those levels. So with ACCUs, same story again. The increase in gas flows have led to an increase in ACCUs created, and I've talked about that already. Pricing, as you can see in the pricing chart, did drift higher. And so, we're pleased about that. It is subject to market conditions up and down and has -- it's come off a little bit since December, but still quite healthy pricing across the 6 months that we're talking about here. The infrastructure and construction side, so it's come down a little bit. So what we've done is we've had the teams -- field crews focus a lot more on the sites, where we manage the gas. That's meant a couple of things. One is those gas flows have increased, as we've talked about, and those increase in gas flows [ meant ] increase in ACCUs and megawatt hours. But it's actually meant there's been less time and less ability for us to get to external sites. And so, that's come down a little bit. Nothing to be concerned about. In fact, probably a good thing that we're actually focusing on our own sites at the moment. So with the balance sheet, the main thing to note here on the balance sheet is the increase in our property, plant and equipment as we're building out those new power stations, that's actually increasing, a [ $7 million ] increase in property, plant and equipment. We've seen the environmental certificates sort of at the same level as they were 6 months ago. So effectively, what that's meant is we've pretty much sold 6 months' worth of ACCUs and LGCs into the market. That's funded a large part of that property, plant and equipment growth. The other part being funded by a modest increase in our debt position, but very comfortable with the balance sheet as it is. With the cash flows, operating cash flow is still very strong and our ability to convert the EBITDA into cash flow is 86%. So that's a great number. So we're really pleased with that. Again, it's those ACCUs getting created and then getting sold through to the market, which has enabled that to be quite a good number. But the main thing to focus on in our cash flows is the spend in our CapEx area. And so, again, we've talked about that, a [ $7 million ] spend in that space, which has contributed to the construction and commissioning of Canberra and the construction of our BINGO site, which Jarryd will talk about a bit later on. Thanks, Jarryd.

Thanks very much, Dean. So coming back to the operational outcomes or the production outcomes achieved over the first half. We have actually reached a new high watermark for the recovered biogas. So this is actually a record level of gas extraction through a 6-month period, which is an amazing effort from our team. One important point to consider with this particular chart is it only shows the sites that we actually derive long-term revenue from. So ACCUs, electricity and LGCs. It actually excludes at the moment, sites like our BINGO Eastern Creek site because we're not yet generating electricity at the facility. So once the BINGO site does come online through the back end of this half or the second half, you'll see this flow chart taking probably another healthy step up again, whereas the flows you're looking at right now are from that broader portfolio that we talked to earlier. Also talking through our availability, so this is from our assets team, looking at power stations and flares. Fairly impressive first half as well because achieving a rate of 98% availability across our plant and equipment is near record highs for us as well. And it's worth noting that the team has been able to achieve that while we've been commissioning the Mugga Lane site or while we're working through that process of having generators disconnected and reconnected at Mugga Lane. So it's very impressive. The increased gas flows and that really strong availability leads us to a nice healthy overall energy production in that first half, coming in at 50 gigawatt hours, which is also a new record for LGI. So certainly coming into the second half now, as Dean said, having the 6 generators on at Mugga Lane, we're in a nice strong position to see that volume continue into the second half as well. Excitingly now that we're 12 months in with our Bunya site, we've actually got a really good set of numbers to go through and analyze. And the chart on the right is actually showing -- sorry, for the 6 months, so July through to December of '24, the average price for the Queensland and New South Wales NEM markets or NEM regions. The really interesting part to sort of draw your attention to in this chart is just how distinct those shapes are between the 2 regions. Now Queensland in the first instance is the blue line. And if you look closely, you'll notice that on average, across this period of time, on the 10:00 a.m. mark to about 1:00, 1:30 in the afternoon for Queensland, the price was actually at 0, whereas you've got a really sharp and distinct peak profile there in the afternoon periods. And naturally, this is what we've been observing for some time, and this is why we've been positioning the business to have the batteries being incorporated, but also having the flexibility as to how we operate the generators because the more we can avoid those low-price periods and position our export in the higher price points, the higher average price we can recover. Now New South Wales is following a generally similar pattern, but it actually has a few more fluctuations throughout the day, which is quite attractive for what we're installing at Mugga Lane. When the batteries come online at Mugga Lane into the later part of the first half of FY '26, it will be really well positioned to capture all of those intermittent changes. But coming back to the Bunya site, now that we've got 12 months of data there, what we've actually been able to look at is how has the site performed on the average price uplift, and that's achieved a 72% increase in the realized price when we include our FCAS revenue, which works out to a weighted average price of $192 a megawatt hour, which we're completely thrilled with. This also gives us a lot of confidence that the strategy is certainly on the right track for our overall 47-megawatt rollout that we've been working through. So talking specifically now on our 2 major strategic projects, so Mugga Lane and BINGO Eastern Creek. As Dean said earlier, the 20-megawatt connection at Mugga Lane was energized in November, and that's allowed the team to then work through a fairly complex process of disconnecting generators from the old connection, moving them across to the new connection, but having to go through recommissioning and recertification of those generators with AEMO. Now ultimately, that took the better part of near 8 weeks through November over December. So that meant that while there was some healthy pricing activity going on in the New South Wales region, which the ACT or our Mugga Lane site sits within is in the New South Wales NEM region, we only captured part of that being that we had 2 or 3 or sometimes 4 megawatts on. We never really had the full 6 megawatts operating through that period. Fast forward to -- as of today, we've now got the 6 megawatts on. So we're well positioned if there are any further heat wave type pricing events that we see typically through February, March in New South Wales or still coming into winter, New South Wales tends to be a bit more of a winter active part of the NEM. So the site is really well placed for that. The team has also been very busy expanding the gas collection system at Mugga Lane. So there's been 37 extra gas wells installed over this period of time, too. And that ensures that we've got the gas flows there and ready to run the gen sets and maximize their capacity. We also finalized the battery order with Tesla, and we are expecting to see the batteries delivered sometime between July and August of this calendar year, and we'll be working through to have them online, all going well into the second half of FY '26. Now fast forward to the BINGO project. So excitingly, the team have been very busy down there with the civil works. The generators and the key equipment has started to be delivered to site, and we are expecting to see our civil works well advanced through the period of March, and that puts us in a really strong position for the plant commissioning into the back part or back section of the second half of this financial year. But we've also been working on the gas field of that site. As I said earlier, the team has been expanding the gas collection system. There's been 32 new wells connected. What we're trying to do there is get the gas flows up to a point that we've been able to then demonstrate that we'll run the 4 megawatts comfortably when we commission it, and we're sitting in a good position for that. But across the board, on those 2 projects, there has been a huge amount of effort and achievement across the full team to do this while we've still delivered on increased gas flows, increased ACCUs and increased power output. So it's a fantastic effort across the board. And then the last point there is around the flaring sites that Dean mentioned that we brought online at Tumut and Esk. So the Esk site, we would have made an announcement approximately a year ago that we won the contract. We love it when we're able to move a contract through from signing through to something being operational within a 12-month period. That's certainly a key target of ours. So it's great to see another site come online. As I said earlier, we have a collection of contracts that we've secured the exclusive gas rights. We just need to finalize the contract CPs and obtain the clean energy regulators' approval as an ACCU project. And once we've done that, we'll then be able to work through the dates and the start dates of those projects. But the second half is certainly sitting well positioned for more gas flows and more ACCUs as well. Now it's one thing for me to talk about how fantastic the team is, but it's also been quite an amazing past 6 months of industry recognition for what it is that LGI and LGI as a team is achieving. So it's been fantastic to see a number of industry-based awards that we've won from the Waste Recycling Industry Association in Queensland, recognizing the Bunya Battery project and its innovative solutions that it's offering through to the Institute of Public Works of Engineering Australia or IPWEA. We actually took home 3 awards at their awards night, which was fantastic, and that was both for the Bunya battery projects and 2 were for the Toowoomba behind the meter energy project. And then lastly, the Sustainable Industry Manufacturing Awards or SIM-PAC, recognizing LGI's outstanding achievements towards the economy and the bioenergy or bioeconomy, sorry, which is just great because yes, again, seeing that the industry is recognizing our achievements is quite a nice feeling, and it's a demonstration of the team's efforts. So coming into the remaining half and for the FY '25 outlook. Again, our absolute focus is a continuation on safety, quality and environmental outcomes delivering on those key strategic projects. It's great to see that Canberra is now in a very good position for the batteries coming into the later part of this calendar year. But BINGO also will be our absolute focus through the second half to see it come online. Our business development team continue to be very busy trying to move excited and interested parties through that pipeline, but there's a lot more there to do. There's still more sites that are perfect for our business model. And we also just continue to pursue opportunities within our existing portfolio to move sites that may be a flare either towards a power station or a battery. And all of this combined is what leads us to reconfirm our guidance that our FY '25 EBITDA is expected to grow by between 12% and 15%, subject to market dynamics and the timing beyond the company's control. Any questions?

Yes, back to Sam.

Yes. Great. Thank you, guys. [Operator Instructions] There are a couple of pre-submitted questions. First on CapEx, you talked through the CapEx slide on Slide 6. Is the elevated CapEx in recent halves likely to sustain? Or are you through most of the CapEx?

It is likely to sustain. So as Jarryd mentioned, we have the Tesla's being delivered -- Tesla batteries being delivered in sort of H1 FY '26. So yes, there's a bit of CapEx involved with that. We also have to finish off the Eastern Creek site of BINGO. So there's still a fair bit of CapEx in the coming half in H2 '25. So yes, we will expect pretty decent capital expenditure across the next sort of 12 months.

Okay. Great. And on ACCU revenues, the ACCU revenue totaled nearly half of your first half revenues. Would you expect this ACCU revenue to return to normalized or lower rates, as generation kicks in? Or is this a new normal for ACCUs?

What I'd say is it's probably the new normal for ACCUs. We expect the volume of revenue that it's created to continue into the future and in fact, even go up a little bit because we'll end up with additional ACCUs in the coming 6 and 12 months. What I will expect, though, is for the electricity segment to become a larger portion than it was for the previous half. And the reason for that is we're going to have the full 6 megawatts of Mugga Lane for the full 6 months of this half, H2. And so, we will expect to see that increase. And so, you probably won't see sort of the ACCU dominate the revenue streams for the full year, but certainly very healthy numbers. We're really pleased with the ACCU performance. We do expect that electricity to pick up a fair bit in the second half.

Great. Jarryd, you spent a little time talking to guidance, reiterating your FY '25 EBITDA guidance, but that suggests you have a much stronger second half. Can you just talk to historical seasonality, in particular, what we observed in FY '24? And is this the new norm in terms of first half versus second half?

Sure. Thanks, Sam. So it's not uncommon in the first half that we see lower average electricity prices, in particular, in Queensland and coming into New South Wales through that sort of spring. Temperatures are quite mild. Electricity demand is not very high. And as a function of that, you tend to see more 0 or negative price points through the day. When you then come into December and beyond with the warmer weather, electricity demand increases, and it's very healthy in the electricity market. So adding on top of that, the fact that we now have the extra capacity in our Canberra site or at Mugga Lane, the volume of generation through the second half certainly will be quite healthy for the business. But also, the extra gas recovery rates and the ACCU creation, which is going -- really going to be quite visible in the second half, coupled together, and it should put us in a nice strong position.

Thank you. Next question is from Jared at Morgans.

Just 2 real quick ones. Look, there's obviously a bit of an employee expense blowout in this half just gone. I think last year and the financial year you sort of controlled that a bit more tightly half-on-half. I'm just interested on where some of that spend has gone, whether it's sort of support roles or revenue generation? And I guess, sort of how do we think about that going forward?

Not a problem, Jared. So certainly, with all that ramp-up work at both Mugga Lane and the BINGO site, there has been some new hires. These were considered and budgeted into our full year model as well. I think the important thing to remember is that with BINGO in particular, we're not obviously deriving revenue right now, but we're certainly carrying the costs. So there is the staffing costs for people on site, boots on the ground, working on the landfill, extracting the gas, but there's also the cost of pipe work and materials and machinery, while we're out servicing these sites. So I think we've certainly put a lot of pipe and material into the BINGO site over the first half to expand the gas system and get the gas flows up. As I said, you're not seeing that in the gas flow chart, and you're also not seeing it flow through in any form of revenue just yet, but we very much hope to see that, obviously, at the back of the financial year and into the full year that we'll be coming into. So cost-wise, we're quite comfortable with the staffing costs as they are across the year.

Perfect. That's really helpful. And maybe just one more quick one, if I can. Just on the commodity pricing, I mean, you obviously benefited quite well in this half given some of the stronger sort of ACCU movements. But I guess since November highs, the market softened up a little bit. So I guess just interested in your views on the broader outlook for that commodity. And I guess, how do we sort of think about some of the integrity concerns as well given you're having a bit more of a voice in some of those consultation discussions, so it seems.

Yes. So firstly, on pricing. So yes, we did see some very solid pricing, particularly at the back end of last calendar year. We saw it happening. And so LGI sort of took the opportunity to sell some into that market as the price was going up. So we did reasonably well with some of those spot trades we did. Look, we -- it has come off subsequently. Now we think the demand from the natural buyers from possibly safeguard mechanism companies sort of drove that price up a little bit towards the back end of the calendar year. They've subsequently stepped out of the market, and we've seen the price soften a little bit. So possibly, we could start to see a little bit of seasonality come through in that pricing. We're not particularly concerned that the prices has come off a little bit. The other thing is we have a reasonably healthy hedge position. The hedge position is well over 50% of our book. And so, we're sort of -- we're very comfortable with that as well. In terms of sort of the integrity measures, look, yes, we are making sure that we're at the table when there are industry consultations occurring with respect to integrity measures, making sure that our voice is heard. Look, it's fair to say that there will be a tightening of integrity across the whole ACCU market, not just in landfill gas, but across all the other methods as well. And so, we will see a little bit of tightening of that market. What that probably will mean is there will be fewer ACCUs in the market as a whole. The one way to tighten integrity is actually is to sort of cut down on certain methods and certain schemes. And so, if we see less ACCUs in the market, as a whole, it possibly put upward price pressure on the market, but we'll see how that plays out across the next sort of 12 months.

Thanks, Jared. Next question is coming from Ab at Shaw.

First question, I guess, maybe for Dean. You spoke to ACCUs pricing being higher in the half versus the PCP. Do you mind just giving us some color on why gross margins declined?

In the ACCU segment?

Yes.

Yes. Yes. So the organization is subject to audits, and we've just talked about integrity. And so, there were quite a number of audits that were actually in our book for the last 6 months. And so, we've been spending quite a bit of money making sure that, that integrity is there. So yes, there is an increased cost in respect to those audits. The other thing is, as Jarryd mentioned, we've actually got more boots on the ground actually extracting that gas. And so, where appropriate, we're costing that labor into that segment. So it's affecting the margin.

Is the audit cost one-off for the half?

So no -- so each project that we have, what happens is there's a series of audits that will have to occur across the time period for which we've got the project. And we're now getting sort of so many projects that we're sort of getting audits pretty much coming through every 6 months. But it's -- on average, I think it's about audit every 2 years for each site. But as I said, because we've now got quite a few, they seem to be falling pretty much every 6 months.

Got it. And the gross margin decline in electricity is much the same reasoning, where the costs come upfront for Mugga Lane and BINGO that segment? Or is it something else?

No, that's really got to do a little bit with my hedge pricing. So when we're engaging in hedges for the FY '24 year, so H1 FY '24, there was still a little bit of residual pricing that we were getting off the back of the energy crisis back in 2022. In fact, I think one of the hedges for one of the quarters in that particular half year was over $200 in terms of price per megawatt hour. So it was actually quite a good hedge. What we're now seeing is when we've laid the hedge groundwork for the half we've just got through, those prices have sort of normalized to sort of that level that you're seeing on the chart there in terms of the long-term average, which will be more closer to $100 for the Queensland hedge book. So it's really -- the decline in margins is a little bit to do with just those residual hedges that sat in the book 12 months ago.

Very clear. And in regards to the integrity of ACCU [indiscernible], do you have any visibility as to when these changes may come about? Will it be before the election or post the election?

Look, we keep giving different time frames, but those time frames keep moving. So we really can't comment. We would love for it to be before the election, so it provides some certainty. But yes, look, personally, I think on the probability, we probably won't see it before the election, but you never know. It might come through.

Yes. And lastly, [ do you mind ] guiding on CapEx for this financial year and FY '26?

Yes, cool. So the 2 main projects that we're spending CapEx on at the moment will pretty much substantively be complete by sort of Christmas next year -- or Christmas this year, sorry. So we will pretty much have the CapEx completed for BINGO this half. And so, we've already spent the bulk of the money on the engines, the HV equipment, the earthworks, the civils. So a lot of that's substantively through the spend for the BINGO construction. What will -- there'll still be some residual spend there. What we'll see in the second -- or sort of the H1 FY '26, so from July to December, we'll see the battery spend on the Tesla's for the site at Mugga Lane. So they're pretty -- there'll be a consistent level of CapEx without giving you a forecast as such. There will be sort of levels that we've seen possibly for the 6 months, continuing for another 2 sets of 6 months.

Next question is from Max at Unified Capital. Those 7 new sites you referenced, any potential to be electricity generating sites? Or are they just active sites?

Look, there's certainly potentially 2 within that mixture that have that ability to grow over time. And that's what we always look at whenever we're exploring the possibility of a site. But where they are sort of today and what we're looking at developing sort of in the more immediate term is a flaring prospect. But with all these sites, once we're on site, we can generally recover and extract more gas, and then that obviously leads into a strong case looking at power generation. So it's always something we contemplate.

Okay. Great. And I think there's just one more question unless there's any late submitted questions or any other analysts to ask a question. Given the recent change in the state government in Queensland, have you seen any policy change or direction? Do you see the change in government a positive or negative for the renewables sector in general.

I would say it's we've had some interactions with the new government, and they've been good to offer time. They've been receptive to ideas. There certainly seems to be an interest in working with the private sector to achieve the outcomes that are required, which is definitely welcoming. They're working through their 100-day review now. And I believe they've already made some changes to the Queensland Jobs and Energy plan, which is to try and signal, where they're seeking private sector investment. So it's still early stages, but there is definitely a distinct shift of interaction between private sector and the government now with the new Queensland government.

Great. Thank you. I think that's all we've got for questions today. If there are any follow-ups, please feel free to send them through to Jarryd, Dean or myself. And maybe with that, I'll just pass it back to you, Jarryd, for any closing comments.

Thanks very much, Sam. Again, I just wanted to emphasize what an amazing effort the team has put in from everyone out on site through to the BD team, our finance team, our carbon teams, our projects team, everyone is really cohesively working together. And if I was to say in one word, the team is definitely humming right now. We've got a lot going on, and it's great to see. It's pretty exciting coming into the second half now for FY '25, and it's putting us in a very strong position, while we're growing out that capacity across our business as well. So we should have, I think it's 21 megawatts of capacity online by the end of the financial year, which is nice and strong in the New South Wales region and the Queensland region. And we're well into our 47-megawatt rollout that we announced last year as well. So very exciting half ahead and also years ahead for the business.

Great. Thank you. Thanks very much for joining today's LGI H1 FY '25 Results Webinar. Enjoy the rest of your day. Thank you, and goodbye.