The Environmental Group Limited (EGL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Environmental Group Limited Fiscal Year 2025 Financial Results Presentation. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Jason Dixon, CEO. Please go ahead.

Good morning, everyone. Welcome to our full year results presentation for financial year '25. I'm also joined by Paul Garske, the Chief Commercial Officer; and Andrew Bush, our Chief Financial Officer. I can handle some of your questions as well. Obviously, we're very pleased with the result for this year, a very strong second half, especially. So revenue of $112 million, up 14%, EBITDA up 10% to 11.1% and EBIT up 8% to $8.1 million. As said there's 2 real key features of this result for me. The first one is that 53% of our revenue for FY '25 was recurring in a large in service, maintenance and spares. So we've had a distinctively strong strategic push in the business to grow that side of recurring revenue in the business, and I'll talk to you about another slide in a minute about that. But secondly, to point out that the second half EBITDA was up 86%. In the first half -- we all know that the first half wasn't great to be at that one single one-off issue within Baltec, but I think we've proved in the second half that our expectations around waste and water and growth in the business was -- has certainly come through better expectations with a spectacular second half of the year. I guess, just broad commentary on the results. So still got elevated demand for turbines for EGL Baltec, both from the switch to renewable energy and from data centers, and I'll talk about that later. But that data center consumption of power is ever increasing and really driving demand within that business. The acquisition of Advanced Boilers & Combustion has been a great success for us to expand EGL. Energy and certainly culturally have fitted marvelously into our business. And then you've seen successful tender wins for both EGL waste through plants and PFAS extraction technologies. And I'll talk to that in some detail. Obviously, we received 2 orders, 1 in the last financial year and 1 straight new financial year, which is very significant to us post the EPA approval. So we waited a very long time as most are EPA approval for the clarenwaste, liquid waste ban. Finally occurred this half after a couple of years of pulling our hair out, but that was great, really and then being able to engage fully with our clients and has generated obviously 2 plant sales immediately thereafter. And importantly, outside of those plant sales, it will start to generate that recurring revenue stream within the business as well, which will commence in FY '26. So EBITDA growth driven by strong performance in Energy and EGL Waste, as I've mentioned, and greatly improved trading conditions in the second half. I guess when you look at the strategy of what we've implemented now over the last 4 years, selling shiny new objects is lovely and exciting for engineers, but it's not a good business model in terms of recurring revenues, and having that continuous cash flow coming in. So it's been a key strategic direction of the Board myself to really transform the business into that recurring revenue sort of nature business, mainly maintenance service contracts and regular service work, all ad hoc repairs, et cetera, and now water processing service charges will come into it as well. So we've grown from 44% recurring revenue up to 53% in FY '25. Interesting, the last quarter with advanced boilers in, that number grew to 58% of all the revenue within the business now fits within that recurring category. So that strategy and strengthening the business and growing our cash flow has paid enormous dividends and we look forward to continue to grow that into the future. And our ambition is certainly to grow that recurring revenue stream even further from here. So just in terms of the operating units, and I don't think we can understate what we've achieved in EGL Energy, bear in mind is 130-year-old business selling boilers, which many wouldn't find too many too exciting, but you got revenue up 42% on PCP, which is an extraordinary result. At the same time, you've got EBITDA up significantly as well at 42% and slight margin expansion. What's been really important to us is we spoke in the first half about wanting to add further technicians to show the support and growth in the business. And obviously, we said we invested some $350,000, $375,000 in the first half and putting on those additional flower technicians. You can see the strength of the result coming through with that extraordinary growth we've achieved in the second half. It's delivered that increase in service work and driven the overall growth in the business, and we'll continue to see that going forward. Unfortunately, we expanded so much that we could put on literally another half dozen service technicians today to continue to grow that side of the business. So I really congratulate the EGL Energy team and what they've been able to achieve. And in terms of its importance to EGL, it's now going to be greater than 50% of all of our revenue and earnings coming through that recurring revenue legislative business. So for those of you who don't know, any boiler over 2 megawatts requires a service technician to sign off on every 5 weeks. So under the standards and codes of things, we have to have a service tech out there every 5 weeks on every single board strove over 2 megawatts that we look after and we've just expanded that range with the acquisition Advanced Boilers as well. So that's going really well. So we bought Advanced Boilers in April for $5.5 million. We talked to the market in about FY '24 number $16 million revenue and $1.6 million of EBITDA. It's a major expansion in our sales and service offering to the industrial boresindustry in Australia. If you think Holland and Ford, let is called John Thompson boilers, the test boilers the Fords and Maxim the Hollands, there clients who simply have preferences between a hold and the Ford -- the simple fact is we now have those -- both those technologies within Australia. The 2 leading boilers in Australia, reputation for long life liability and greatest energy and combustion savings in the amount of gas going through those boiler systems. So we've got the #1, #2 boilers in Australia, and we own all of that technology. It also brings an incredible amount of complementary expertise in fabrication and boiler fit out to our business. And Tomlinson's were always incredibly strong at service. Advanced Boilers had that back end of being able to do the the fabrication fit out. And a really simple example is there the fabrication facility now for our PFAS plant sales. And in context of that, they're building the pump skids, they're fabricating the whole plant. They're doing the tanks, the blowers. They're doing all the control panels for the entire group. So not only do we pick up the #1 boiler player in Australia with the alternate leading boiler to ours, but we picked up this fabulous ability to internalize all of those fabrication activities as well. And we think it might hit as high as in internal fabrication in FY '26, which will be a tremendous result for the business. So in retail Baltec and the gas turbine side of it, it's no secret that we had an issue with one single project in the first half that obviously impacted our margins and our EBITDA. What's really pleasing to see is we hit our revenue targets and we've spoken also up 32% as we -- as our fabricators increase their fabrication capacity up in Vietnam, which is great. It was obviously very disappointing that we had that one-off issue with that project. But -- what we're seeing today is we're achieving the margins we always expected in our gross sales and what's coming through in the projects put that on cost overrun behind us, that was literally a one-off. That should return to normal again in FY '26. There is also a margin impact there from a job we're doing at Pelican Point in South Australia. It's a real installation job for that. And when I say there's a margin impact mix, there's nothing negative about it whatsoever. Because we don't really do installations, we tell the client, we'd only do it at cost plus a fixed margin. We're willing to accept at a lower margin, of course, because we've got 0 risk on that job, and it's been a significant part of our revenues coming into FY '25, so impacted margin, but a completely different risk profile. So we expect to see that return to normal, as I said, in FY '26. And what we're seeing now in our pipeline coming through is a really strong margins. So strength that I, as I mentioned to you, generated by peaking power stations as renewable energies come online. We all know if Sun doesn't shine or the wind is not blowing, we're going to turn on the gas turbines. In peaking power mode, they can be spun up in about 7 minutes for power generation, turn on and off equally as quickly, and we lead the technology around the noise attenuation and being able to dealing with peaking load silences around the world. So that part of the business is going really well. And the other that's really has come to the fore is the power demand underlined by increasing requirements of data centers. As we understand it, around 50% of all turbines on order in the world now are going to data centers. I heard an amazing comment. I'm not sure how accurate it is, but an AI search requires 7x the power of a simple Google search. So the demand in those data centers is enormous. And that means we're seeing a peak backlog within that industry. And a lot of the OEMs are now sort of sold out until 2030 as we understand it, which is a very good pipeline for us going forward. Our pipeline remains very, very strong. And a good order book as we see. So we continue to see a good outlook for that business and certainly return to normal margins very, very quickly, which is great. EGL Clean Air, as we've spoken about, I guess, for the last 12 to 18 months now, lithium market conditions at industry is all but close developing new refineries in Australia where we do the kiln gas of scrubbing systems. Also a real slowdown in nickel in Australia with the growing 30 nickel coming out of Indonesia and unfortunately, the closure of [indiscernible] aluminium refinery in Western Australia. And this is where TPC has done a lot of its work dealing with chemical scrubbing systems in the past. So it's had a tough pathway, but clearly just part of the normal resources cycle that we can't escape as a business, but we're obviously doing everything we can now to diversify away from that. What we've seen is a great pull-through in demand from AGL waste, through new plant installations and new technologies like dry fogging that Paul Gaskett will talk to in a minute, we're actually repositioning that business and to make sure we're not as reliant as the lithium sector markets continue to grow. We are seeing the green shoots of course, you're seeing EBITDA 13% higher in the second half than the first half. So we are starting to see that business improve now, which is which is terrific. I might hand over to Paul, if that's okay, to talk to waste and PFS for the next segment of business, please.

Thanks, Jason. As Jason previously advised, we're reporting waste and water together as one now. So we have had a strong result driven by a number of tender wins over the course of the back half of the financial year, which include construction and demolition plants, along with material recovery plants, those facilities across Australia and New Zealand. So it's pleasing to get a material recovery plant up and running, which will happen over the course of this financial year. The strong pipeline and outlook for future projects and installation is still very, very strong and pleasing to see that we're going to continue on with our current performance in that area. I guess the focus over the course of the last 12 months has been in the sale of spare parts, and we've really started to push into that market, and have seen that really start to gain momentum over the course of the last half of the financial year. Pleasingly, that we did finally receive EGL's patent technology for the recline sorry, EGL's approval for claim waste facility in Laverton. So the EPA approval came through on that, which was fantastic. We also received the U.S. patent for removal of PFAS for a plant as well through the course of this year. Further to that, our plan, we've also developed technology for the removal of ammonia, which is an added waste stream that we can treat along with PFAS. Since our new PFAS treatment plant design and construction order received, if the financial year '25, year-end, we expect it to be operationally in -- so that there's -- certainly, as we reported earlier in July of the design and construction of the new plant, which will certainly get underway for this financial year. Service revenue from installed PFAS plants will start to kick in once the plants have been installed after commissioning. And that will then obviously contribute to future earnings of those plants.

It's really important to comment that while we were pulling our hair out waiting for the EPA approval down here in Victoria, and it did take longer than expected. We're working on several other product lines, as Paul alluded to. And those multiple PFAS plants that we sold in the last 3 months are a very good example of how we're dealing with that. So as mentioned, one of those plants can do ammonia removal prior to PFAS. That's really important because in landfill leachate ponds, with the organics as a build up of ammonia, and it is a problem waste stream for the liquid waste industry and for those owners of landfills. So to be able to do that in the same process in the same plant is a unique offering by EGL and no one else can do it, let alone the PFAS extraction technology but through a combined treatment method. The next plant that we announced the -- sorry, we didn't announce all that first plant is within our in our budget and within our numbers for the second half of financial year '25. The next plant we announced the sale of at the beginning of FY '26, different plant again. So that plant is able to do soil washing facilities, which is a very large scale plant and a different design, the same processing methodology, but a different design and how that operates. But a really good example there. The 3 plants that we've now got out there, One is a standard lipase treatment plant. One can do ammonia as well as PPaaS, and the next one can do sort of washing PFAS in a completely different environment. So while it seems frustrating that we're waiting for all those approvals to come through on PFAS. At the same time, we broadened the markets that we're able to enter into. We've been very, very successful and how we've done that. And now we've already been asked to do a combined trial with one of our clients as well on buyers, so it's for PFAS removal. So I think that means going forward, we've got a deeper market to sell into. Since we got approval, the Board is going ahead with our full strategic plan, we've employed direct salespeople now in that PFAS industry selling plants, the response from the market has been very, very good. And as I mentioned earlier in the call, having ABC on board now to be able to fabricate those plants means we can also produce more per annum as required. And as Paul mentioned, with the install plants now coming online later in this year, we'll also start to get that recurring service revenue from that business, which will again build up the strategic nature of our recurring revenues within the business. So stronger outlook there. And as Paul mentioned, we had good sales of recycling parts as well. I think I just mentioned, we talked about this one-stop EGL on how it all fits together. And there's one particular client that we're doing a PFAS plant for at the moment. At the same time, they've made inquiries about 2 separation plants, both construction and demolition separation plants. They've made inquiries is about a biomass boiler. We're dealing with some of their organic waste streams. They've approached us about being able to extract PFAS and have also spoke to us now about how they can find a solution for one of their byproducts out of their plants, which is the sort of washing plant, which is Clay byproduct. And could we do something to high grade it and grind it to go into a concrete plant as an alternative use of those -- that particular waste stream. So that's a great example of a client where we've spoken extensively about how our ability to offer solutions broadly into that industry has simply growing from strength to strength. And for that particular client, you'd be talking about tens of millions of dollars worth of solutions for them, plus the ongoing recurring revenue streams. At the same time, another much more simple example, the Mirth that we've sold into New Zealand, which is a material recovery facility that requires a bailer just to simply deal with the product at the end of that. So we'll have a Vale going in to to there as well. And as you know, a sort of standard offering now for when we sell a waste plant is to offer the dry fogging systems that new technology that we brought to Australia, the dust extraction systems required any air movements within the facility itself. The balers on the back end of the process is, the structural steels letters and platforms to Australian standards. And also, if required any medical waste treatment, we can do their boys and auto class. So we continue to penetrate that industry particularly well. And we're starting to see the fruits of our labor over the last couple of years to see a very, very strong client interface across many of our business now into that massive $18 billion per annum at sector. Just in terms of the outlook, we expect normalized EBITDA to grow in the range of some 15% to 20% compared to FY '25. And I make the point that each year, we've substantially grown the business organically and by our acquisitions and have met guidance, if not exceeded guidance. So we're we're quite confident in the position where we're at for this year again. We will continue to reinvest business cash flow into the business. We've grown the business in turnover from $44 million to $112 million over the course of last 4 years. So of course, you need to develop your systems such as your ERP, along with that. So we're going live in our ERP later in the second half certainly expanding other areas of the governance within the business. So we are recurring. We have built stock, and obviously, that impacted cash flow, especially in the final quarter because we had such an enormous last quarter. That's gone into contract assets, which simply means it's work done that we're invoicing that invoicing is obviously take place in July and August that all that cash will come in the door quite quickly now. And as I said, by the final quarter financial year '25 recurring revenue streams up to 58% within the business, and hopefully, we'll continue to see that grow. So I guess that's my comments for now. So operator, I'm happy to move to questions.

[Operator Instructions] Your first question comes from Ben Wilson with Wilsons Advisory, who asked re FY '26 guidance suspect a bit of conservatism in the growth range. I think about the various growth drivers across the segment, I assume that they're all still intact. Baltec Renewable Energy the remaining full year impact from ABC, et cetera, work and PFAS contribution from the tender wins and...

Right, you're not particularly clear in your audio. So thanks for Ben, I'll hand the question. You're just not coming through rate clarity there. So being conservative in the growth range, I got to be careful. I've got a board member on this call as well. Clearly, in this day and age, we need to take into account what's -- what we can see and what we can see going forward and there's always going to be an element of conservatism. You don't want to let the market down. We had that issue with Baltec last year and got absolutely smash for it. So I won't say it's conservative, but I will say we make a clear state from our outlook that we've met guidance every year. I think we've upgraded 3 out of 4 years in a row. So when you look about those drivers, the acquisition of ABC, Baltec going particularly well as with renewable energy and the data centers. the increasing amount of internalized work, ABC, PPAS and waters, we're very comfortable with the outlook for the business and certainly see very strong growth within those sectors. Your question regards on cash flow, you absolutely right. It is extremely strong fourth quarter. I think revenues in June were up over $13 million in that month alone. So it just has a buildup in contract assets, as I mentioned, were simply work done throughout June that has been invoiced, Obviously, you're waiting for month end, but that will flow through quickly now. Your question on the Baltec margin. I think I've already addressed that by talking about Pelican Point. It was a big chunk of our revenue in that second half. It might have been a bit in both parts. And as I said, that was at a lower margin because we had 0 risk on that job. So it was around about 6% gross margin than our standard sales but -- and a reasonable chunk of that revenue. So that's all it simply was there. I thought we'd previously explained that that we've taken on a job. And to be honest, we've got 0 risk earning greater than 20% margins, you'll take that job all day, any day. So you'll certainly see FY '26 return to normal. Update on PFAS, the 2 operational plants, claims, obviously, in and running as we speak. So the other 2 plants we're obviously in the point of fabrication now. I can't give you exact dates, but I'd expect both will be online by the end of the year. I think we're expecting to deliver one in late October, off the top of my head and 1 slightly after that. So they're in the fabrication stage. All the engineering is being completed and hopefully commissioned up later this year. Pipeline for new orders, we've put on 2 direct salespeople in PFAS since we got the EPA approval back in whenever that was April -- we're getting a lot of traction in the market now, which is great. We're getting multiple appointments a week. We've got several other pricing tender or not -- tenders not the right word. We provided pricing to several other clients on plants. But I guess what's really important to me, it's really across a broader sector of the business. So we're doing it for water authorities. We're looking at buyer solids, [indiscernible], as I mentioned, standard industrial orders. So it's a great variety through the industry. We've really proven how wide we can open that marketplace up. So pipeline for new orders is certainly looking good. Next question states the tenders for the waste plants that were mentioned at the Wilsons conference. So, that's a hard one for me to answer exactly. I'm pretty sure we signed a contract on one of them in that time frame, which I'd assume is the New Zealand materials recovery facility. There's another construction demolition waste plant that we've been working on for longer than we expected, to be honest. I'd expect that to close out very shortly now. There has been several design, changes going through that plant, which means it just has to go back for review and making sure it's achieving the end outcome for the clients. And interestingly, there's always a debate between OpEx and CapEx. So that's taken slightly longer than expected, but still absolutely on track. Next question, contract assets, $18.7 million, gross of $23.1 million, liabilities 4.4%, unusually high, leading to negative cash flow. So that question is, of course, accurate. But at the same time, if you're growing the business at the rate we grew in the final quarter, that's going to happen. Our contract assets up year-on-year were up $10 million. It's obviously just a very temporary cash flow issue. You've done the work. You're then doing the invoicing and all the money comes in the door immediately. So they have declined post the balance date. I couldn't give you the number as of today, but I know in July, contract assets were down by more than $2 million, which have gone straight into receivables, if that into cash at banks. So yes, the positive cash flow is coming through just simply a timing issue. And if that's the worst thing that happens about growing the business as fast as we did then no issues at all. Next question, EBITDA, second half, $7.2 million, doubling it will give you $14.4 million. Midyear gone $13.1 million, what's the difference here. Well, that's a pretty simplistic question, to be honest. So clearly, if you know our business, the fourth quarter of the financial year is extremely strong, especially in the energy business as winter sets in and everything. Gets fired up. So just taking a number and doubling it is pretty basic analysis. You'd have to understand or talk to the company about a little bit of seasonality within the business. The guidance is a range, of course. It's very early in the financial year. So I guess the difference is what we know that is locked in the bank now in [indiscernible] further achieve in the business going forward. There's certainly no business likely to form not sure where that's come from. We've stated very clearly that energy is an incredibly strong footing. It's boiler sale has been terrific. So far this financial year, and it's trading very, very strongly in service expanding. ABC shooting the lights out. EGL Baltec, of course, you'll see that return to normal margins without a problem in the world. and air, as we've said previously, we think we've seen the bottom of the market and you start seeing some green shoots of growth coming through. So I can't agree with your statement there. If you live in the real world, though, we're going to make a guidance -- provide a guidance that we think is sensible. So early in the financial year. And if we need to adjust that guidance down the track, we we certainly will as necessary as we get further visibility into the business over the next few months or 6 months. What I will say is -- and I guess it's the problem of using a spreadsheet. Our corporate costs were up about $900,000 year-on-year and it's something that the market doesn't see. Our insurance bill in the last 4 years has gone about $450,000 a year to about $1.5 million million a year. So I guess they are the numbers you sort of don't look at to take into account. The other things are, because we've grown and expanded so rapidly, we're combining multiple premises around Australia in this particular period. In Queensland, we've moved ABC, [indiscernible] on to 1 facility, which, of course, a very large warehouse and office complex. We're doing the same in New South Wales right now. I think air types already moved. I think advance might have been there with Thomison still to come. Simple things, again, that's not in your spreadsheet, i.e., it means we've got to lease double premises for a quarter while we're moving and integrating those businesses together. Clearly, the long-term benefit for us is enormous that you have that cross divisional cell. Everyone is in the the on premise, it lowers your footprint that you need for your warehouse that lowers all your ESG emissions. So it's very, very strong outlook for us going forward. And the other one I'll comment on if we put another 6 service technicians, we know we have to invest into that as well. I think each one costs about $50,000 or $60,000 to train up before we're earning revenue. So I think we've got an extremely strong outlook for the business. So there's a lot of questions. I'll zip through as fast as I can, is 50% of revenue is now recurring. Can you explain while work in progress is sitting around 20% of revenue. Yes, they're very, very simple there. So within that service doing charge within that energy business, I think there was over $7 million in that alone, which is completely recurring revenue, but it's just getting those jobs completed and invoiced out. So I don't see that absolute correlation. Clearly, there's some project work in there, but there was ended [indiscernible] on the line item. Am I correct around that level of work within the energy business that's sort of do and charge up over that $7 million mark.

Yes. Well, overall, in the Energy business, the contract assets, the contract assets rose from 5.3% to $11.2 million. that would have been doing charge mixed with project work.