Perenti Limited (PRN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Perenti Operational Update Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Norwell, Managing Director and CEO. Please go ahead.

Good morning, and thank you for joining us today for the Perenti Operational Update. My name is Mark Norwell, Managing Director and CEO of Perenti. And joining me today is Peter Bryant, our CFO. I'd like to start with the recent changes to the Board. Earlier this week, we announced that Ian Cochrane had retired from his role as Chairman of the Board of Directors due to health reasons. With Ian departing, we welcome current Non-Executive Director, Rob Cole, as Chairman. Rob has more than 30 years' experience in the energy and resources industries and has been a valued member of the Board since 2018 and was appointed Deputy Chairman in 2020. We look forward to continuing to work with Rob, and under his Chairmanship, we'll remain focused on executing against our 2025 strategy. I'd like to thank Ian for his many years of commitment and dedication, not only to Perenti, but to the broader Perth business community. Over the last 3 decades, Ian has developed a reputation for his integrity, business acumen and down to earth approach. Ian has been instrumental in the evolution of Perenti and has been involved with the company since first listing in 1994 as Ausdrill. Since then, the company has grown to become one of the largest and most respected mining service companies globally, and Ian has been a significant part of the Perenti journey. His valued input in the boardroom will be missed. Our thoughts are with Ian and his family as he focuses on working through his health issues over the coming months. Now I'd like to provide an update on recent operational performance and the outlook for the business. Firstly, I'd like to once again commend all of our people for their commitment and tireless efforts in managing and dealing with the persistent challenges that COVID-19 has presented. Over the quarter, we have continued to deliver on our 2025 strategy by securing new work in North America, releasing $87 million in cash from West Africa by exiting the Yanfolila and Boungou and securing over $700 million of work in hand calendar year-to-date. These achievements have occurred while we navigated a number of broader global and local headwinds. During Q3, the business has continued to face external headwinds similar to those in the first half of FY '21, particularly the ongoing impact of COVID-19 and the strengthening Australian dollar, plus the recent tightening labor market in Australia. The characteristics and spread of the virus is beyond our control. And as a result, we're still experiencing productivity impacts. These impacts are caused by ongoing longer rosters for our expat workforce, the reduced ability of our senior staff to travel on-site and broader logistical challenges. To further exacerbate this, the emergence of new variants of the virus and hotel quarantine issues in Perth and Melbourne has added to the logistical complexities. While we are navigating the COVID-19 landscape, the impact to the business is clear. We've seen ongoing operational impacts. In addition, and as has been widely reported across the resources sector, a tightening labor market in Australia is becoming increasingly evident. For Perenti, this has manifested in higher employee turnover rates and wage growth, impacting business margins. But we have recognized this and have responded by deploying and continuing to develop targeted attraction and retention initiatives, with the aim to maintain our high-quality team. Notwithstanding these labor market conditions, we are confident that Perenti and our employee value proposition positions us well to source and maintain appropriate personnel levels to deliver on our current and future contract requirements. As I also mentioned, the Australian dollar strengthened further against the U.S. dollar, which is negatively impacting our financial performance, given a significant amount of our earnings are U.S. denominated. Our forecast at the time of the first half FY '21 results were based on an FX rate of $0.76. However, during the third quarter, the average daily average FX rate was above $0.77. When combined and with the expectation that these conditions will continue into the fourth quarter and beyond, we have revised our outlook for the second half of FY '21, primarily due to the expected softer performance of our underground business. The context at the half year for FY '21 results, we forecast that our second half revenue and operating margins will be in line with those reported in the first half. However, we now expect that consolidated operating margins for the second half will be softer than the first half. Even though we expect that the current backdrop will continue beyond the end of FY '21, we also expect the forecast growth in revenue and earnings in FY '22 to be delayed. I would now like to expand on the recent achievements of the business I mentioned earlier, as individually and collectively, they represent significant progress towards the delivery of our 2025 strategy. In recent months, we expanded our growth pipeline by more than 20% with a focus on underground gold and nickel projects, working with top-tier mining companies in Australia and North America. We successfully converted some of our existing growth pipeline in a work-in-hand, announcing several contracts -- contract awards totaling more than $700 million, with another $320 million of work related to letters of intent, for which we are in the process of finalizing contract terms. Of particular significance is the Red Chris letter of intent with Newcrest in Canada. Whilst this initial piece of work is relatively small, it represents a far greater opportunity for Perenti. Firstly, it puts us in a strong position to capture future revenue growth with a global top-tier gold mining producer. Particularly, Red Chris represents our second underground project in North America, the largest underground mining market in the world and a key pillar of our strategic growth. And third, our win at Red Chris is recognition from the North American market that the expertise Perenti has developed over the past 30-plus years is a service offering that is attractive to the North American market, capable of delivering significant value. Now to our surface business. Since we announced the completion of the strategic review of our African mining surface business, I'm really pleased that the African surface business is performing to expectations, and we have seen a significant improvement in our African surface mining risk profile. Our view is that the AMS business has now shifted from a position of net risk to new opportunity. Although the Surface Australia business has been impacted by the tight labor market, we continue to expect that the surface business as a whole will deliver revenues and operating margins in line with those reported in the first half, if not offering some slight upside potential. To add to this, I'm pleased to advise we have received additional cash payments related to the exit from the Boungou and Yanfolila projects in West Africa. To date, we have received a total of circa $87 million in cash, and we hope to realize some additional payments as we finalize working capital balances. However, $87 million is at the upper end of what we reported in February so we are very pleased with this result. Lastly, and certainly not least, the Investments business. We expect the Investments business to perform similarly to the first half of FY '21 as the recovery of BTP is progressing slower than expected, and the operations have been impacted by the Australian labor market. As a result, we expect the Investment business will deliver revenues and operating earnings broadly in line with those reported in H1. In summary, I'm very pleased with the efforts of our people and what has been achieved in the last few months, given the ongoing challenges, and I truly believe that we are well on the way to successfully delivering on our 2025 strategy. We recognize the headwinds we are facing, and we have strategies in place to manage the effects of these headwinds. Going forward, we will continue to focus on executing our 2025 strategy, winning new work and delivering projects. In time, we see significant upside in our business, and we are really confident that we will manage the current environment to deliver consistent, high-quality operational performance that will generate long-term growth and value for our shareholders. Thank you. And now we'll open up the call for questions.

[Operator Instructions] Your first question comes from Michael Aspinall from Jefferies.

So firstly, can you just characterize the hit to margins in terms of wage inflation versus a hit to productivity due to the turnover or tightness in the market?

Yes. Michael, thanks for the question. I guess if we look at the Australian market, it's hard to really sort of differentiate between sort of those direct costs, I guess, in terms of wages and turnover. I guess, firstly, on wages, what I would say is whilst we do have rise and fall protection under our contracts, generally, what we are seeing is the -- I guess, the labor rates move at a sort of quicker rate. And we update our indices every 3, 6 or 12 months depending on the contract. So what we're seeing is a different sort of impact on the various jobs, subject to the rise and fall provision. So Michael, hard to sort of really sort of outline exactly the split, but we're certainly seeing sort of pressure there. Peter, I guess you've got anything further to add to that?

No. I think also, what we are phased into is bonus payments, et cetera, being paid when other people are trying to attract staff. And that is something that ordinarily is more difficult to recover for us when we have to deliver the final bonus of, say, $10,000 to sign up.

Okay. No, that makes sense. And could you just characterize maybe then your book in terms of how many of your contracts would have a 3-, 6-, 12-months' time lag for recovering rising labor costs?

So that is a good question there, Michael. I guess we've got a varying sort of contracts, some from sort of fleet rental contracts through the sort of long-term contracts. And to be frank, I don't actually have the percentage of what's 3, 6 and 12 months.

No. No, you're in line. And Michael, if you think, the top line of the mining, sort of underground contracts there's circa 54 of them. I would say I'm very, very, very, like, 90-plus percent -- in fact, probably 99 percent on having rise and fall, we just don't have the splits on the turn -- the 3, 6 and 12 months.

Okay. Okay. No, that's helpful. And then if I'm thinking about the hit to underground, is that labor tightness impacting the Australian operations and turnover there or Africa or is it both?

Yes. Look, it's twofold, Michael. Certainly, the -- I guess, the sort of tightening labor market in Australia is really a direct impact to our Australian operations. But it's also having, I guess, an indirect impact to international operations. And that's sort of magnified, if you like, by COVID as well. So with the ongoing sort of, I guess, delay with sort of vaccinations, the ongoing sort of impacting controls around COVID, we are seeing more challenging to attract people to take them out of the hot Australian labor market to go and sort of work long rosters overseas and experience quarantine periods, certainly, coming back in Australia and potentially into the country that they operate as well. So definitely a direct impact in Australia and also indirect to international, less interest as I explained.

Yes. Do you think that, that could have a longer-term impact in terms of people just deciding they do want to work closer to home? Or they're always willing to jump on a plane and go work in Africa, given the uplift in earnings?

Yes. I think to that point, Michael, I think there's always going to be people who are sort of willing to sort of work internationally. They have the ability to sort of have the roster breaks in sort of other parts of the world and sort of rotate that around the higher sort of pay that sort of comes with working internationally. So I think once we get back to some level of normality sort of once the vaccines take hold and also we get more commercial flights flying, which if you look at sort of Qantas and sort of their timing, it's probably going to be next year at some point, I think, you'll definitely see people keen on international work.

Okay. Cool. And just 2 more. Are new contract signings continuing in the current market?

Yes. Yes, they are. So we announced the Red Chris project a few weeks ago. So we're currently mobilizing that work into Canada. And that's in the province of British Columbia. So we're doing that currently for Newcrest. The Savannah project, we are intent there that we're finalizing the contract in prepping mode for sort of circa July of this year, and we're still actively generating jobs as well. Our pipeline was circa 9 bill when we reported our half year results. We've seen an increases of north of 10, given the sort of activity out there at the moment. So certainly seeing contracts awarded.

Cool. And great. And last one from me. You've mentioned your 2025 strategy a couple of times. Can you just provide us with some additional details on the main elements of that?

Yes. So a couple of main elements there, Michael. We first sort of released that to the market, if you like, 2 years ago now, and a couple of the key items there is shifting our business into better jurisdictions, for example, Canada. So we're looking to increase our work and our earnings out of North America through the underground service. We're looking to increase our earnings in Australia. So we continue to bid. And we also see sort of Africa, not a sort of one sort of mast, if you like but we see there's a number of countries. And therefore, we've brought out Botswana as a very good country to operate. So we're shifting into, what I'd say, is better jurisdictions, and we're progressing that very well. The other is about sort of the balance sheet, releasing capital out of West Africa from AMS, improving our cash position, which we've been doing well over the last couple of years. So we're continuing with that technology. A key focus across the whole mining industry and sort of the world more broadly. We're progressing in that area very well. And we also -- I specifically called out the challenges in AMS, and we are seeing some recovery and some green shoots coming through there. So I guess that's a sort of high-level overview of the sort of operational aspects. The other point there, Michael, just quickly, is the ongoing investment in our systems and processes to support our global business. And secondly, investment in our people. And if we think about the tightening labor market at the moment, we're well positioned there in the fact that we have been investing in people pre the market tightening. So that's the broad overview of the 2025 strategy.

[Operator Instructions] There are no further questions -- my apologies, your next question comes from Cameron Bell from Canaccord.

Just coming back to the rise and fall. So I understand there's a range of metrics within each of the contracts and that can differ. But when you think about labor costs going up, how much of those labor costs are specific in your area of work, say, WA, for example? How much of that labor cost increase do you think you can actually recoup?

Yes. Sure, Cameron. So I guess 2 parts to that. One is, let's say we do a pay increase today and a particular contract may have an update in sort of next month or maybe an update in 6 months or it might be linked to labor indices, and labor indices are generally published quarterly or half yearly and lag. So I guess that timing will dictate sort of what recovery we do get, and that is very contract-specific. The sort of second part is in terms of our labor base. It probably varies in the range of 30% to 40% of our cost base across our projects. So we then have that level of, I guess, cost built our rise-and-fall formula. So our rise-and-fall formula will cover various materials, if we're providing fuel, labor and other consumables. And the fact it will be based on our direct cost input. So if we do see labor change, it will be 40% of our increase linked to labor for our revenue. So other than timing, it should cover the labor cost. It's just the timing that the issue is, Cameron.

Yes. Okay. I guess, thinking about it from another way. Are you -- with the new contracts that you tender now, noticing that, say, wage inflation is probably going to be much higher in WA than it is, say, Victoria and New South Wales. Are you changing the indexes that you use in your contracts to try and better defend yourselves?

Look, we review those each time we tender and also extend any contracts. And I guess on the flip side, there's potential at the back end when you see the pressure come off so then labor can recover when the wage pressure comes down. So we're mindful of the back end as well rather than just the initial. But in short, each time we look at an extension or a new contract, we always review this urgency based on what we know at the time. So yes, if there's the option, we will reset.

And Cameron, irrespective of labor pressure, we always try and put ourselves in a position that provides us with the best protection possible of any inflationary pressure on our cost base.

Yes. Okay. How is Mako going?

Mako is still challenging. If we think about what we've been working through in AMS, I guess, is the broader aspect of AMS. But the 3 challenging jobs we called out, Boungou, Yanfolila and Mako, we've addressed 2 of the 3. We're now working on the third. That is an EBITDA-positive job. EBIT circa breakeven, I guess, but EBITDA positive. We're working through the mine plan with the client. That's work-in-progress, Cameron. And I guess, we see that as challenging to sort of reset with the client but we're working to see what we can do. The positive about being EBITDA positive is we're continuing to depreciate the assets there, generate cash on the back of that. So we are managing our PP&E in Senegal through depreciating the assets.

Yes. Okay, sure. And I guess a similar question. How is the progress at Zone 5 and Hemlo?

Yes. In Zone 5, yes, that continues to be challenged, I guess, by ongoing COVID impacts. And I guess, if I just talk about some specifics, so I spoke about logistical impacts opened up the core. But maybe just to put some more detail on that. And if you think about the reasons of Perth quarantine, hotel issues and then you said the government reduce the number of overseas travelers by half, that requires us to look at different ways to bring our people back in, extending further rosters. We are seeing, for example, Tanzania, and Tanzania has a new President and the previous President said COVID didn't exist. The new one is sort of a bit more open to reality, and we're looking at some quarantine there at the moment, we're just working through. But specifically, coming back to Zone 5, that has been impacted by just the availability of getting people into Botswana. We are, however, working closely with the client and governments to look to put on additional crew. So we're looking to put a fourth panel into Zone 5. That's the early days discussion. So we are looking to actually ramp up that despite COVID impact. So that's our focus at the moment.

Cameron, I don't really then give a lot of project-specific details, but I just might add in terms of the drivers to the softening second half revenue, Zone 5 and Hemlo, are a significant component of that in terms of the impact COVID has and the performance in terms of physicals and those revenues for us against the targets or forecasts that we had.

Yes. And then I guess just last one from me. Obviously, North America is a pretty big part of your future and the quality and the price in the business, et cetera, going forward. In regards to your progress to date, are you happy with what you've achieved? Or were you hoping for a bit more or less? How do you see yourself going so far?

I think to be able to win 2 projects, mobilize one and be in the process of mobilizing the second with a global pandemic, given the challenges that were unseen including our clients, I think we're doing a fantastic job, to be frank, to take that on. So we could have said, no, we're going to stop growth in North America when COVID hit. But we decided to forge on. We're profitable. Yes, it's challenged, but I think given the headwind to COVID, building a progressive business in North America, I think, is really well done by the team.

And Cameron, I just want to go back to the Zone 5 as well. It's important just to note that, that revenue loss or revenue reduction is not a revenue loss. It's effectively a revenue deferral. We're behind the ramp-up schedule. But ultimately, we will deliver the ramp-up, even if it's a little bit long. So the revenue will come our way. It's just deferred because of the impact of COVID.

No, I think -- sorry, Cameron, just rounding out sort of North America as well. We are seeing clearly more Australian clients sort of looking at North America with activity there down some time. I think by progressing with our entry in North America through COVID, once the vaccine takes all of it across the world globally and we start sort of getting back to whatever the new normal is, I think we'll be far better positioned by the fact that we continued with this expansion. So we're not flatfooted back into COVID. So I think it is very positive.

Your next question comes from Trent Barnett from Hartleys.

Just -- can you just clarify a little on the commentary around FY '22 and the delay to revenue and earnings growth? Is that -- should I assume that means no growth? Or is that sort of your expectation of an absolute level?

Yes. Thanks, Trent. I guess, look, we're still working through our FY '22 budgeting process and business planning process. So I guess at this point in time, we have nothing sort of definitive. But what I would say is, I guess, given the recent government budget, there are comments regarding COVID restrictions, the hotel quarantine outbreaks. We were hopeful, like I think most people were that we're going to see some abatement of the restrictions during calendar year '21. What we're saying is we don't see those restrictions easing throughout FY '22. Nor do we see the tightening labor market between WA coming off in a hurry. We think that's going to be around for a fair portion of 2022 as well. And the strengthening Aussie dollar. Look, I'm no economist or no sort of futurist in terms of strengthening dollars, but we expect that will probably continue. So I guess on the backdrop of those sort of 3 macro headwinds, we are saying that's going to continue to impact us throughout FY '22, and we're currently assessing the level of that impact. So I guess, Trent, based on that, we are saying we think it will be flat because of the impediments that we've discussed and continue to see. Peter, anything to add there?

No, I think you summed it.

Okay. Obviously, you've got some really great people and skill sets and things, and they're very, very scarce at the moment. When do we start seeing a premium for that? When do you start adding in scarcity premiums into contracts that you're tendering on?

We're -- so tendering, we are including that incentive. So with incentives, we are looking at the margins given the sort of hot labor market and also, I guess, the mining industry demand more broadly. So that's flowing through the current tenders. And look, we are looking at, in some cases, cap enhanced to some clients. So we're putting some retention programs in place for our folks in Africa, and we're talking to our clients given that they benefit from the performance we deliver to them. So Trent, we are looking at some cap enhanced sort of options at the moment.

Your next question comes from Nick Robison from Jarden.

Just firstly, on the, I guess, the cycle of the labor market and the way that your pass-throughs work. I mean, obviously, we've been here before, probably 2002 through 2012. And from memory, the industry kind of got called out then on the rapidly tightening labor markets as well. But then you went on to, as a group, make record margins and profits. I mean how are you feeling about this market? I mean we've got record-high commodity prices across the board, particularly, in Aussie dollars. Basically, everyone, particularly those of you that are WA-based, look like you're getting caught out on labor here. You're not the only ones who have said this in more recent times. But historically, you've moved on from these types of problems after 6 or 12 months and then being able to grow margins from there. Is that how you're currently thinking the cycle looks like it would be playing out?

I don't think so, Nick. Our view, and it goes back to a bit of outlook point in North America. Our view is we were well positioned. Yes, we're being impacted by the 3 broad headwinds that I mentioned before. But the base of the business is strong and stronger than it had been for some time. And our focus is to manage through those headwinds. And when we come out the other side, that certainly is what we're looking at, Nick, in terms of the opportunities and just then going to their office site. Absolutely the focus. As far as, I guess, being called out, I think we see the broader macro view about Brazil and our own iron ore production, and that's flowing back into the Australian iron ore market, which then flows through into the other mining sectors. Clearly, the impact of the global macro shift. We are through seeing the impact of that. I would say, though, that we do have our senior people being stable. We are seeing that at the operator maintainer level, which we're sort of managing there as well. So making sure, agree. We hope that once we come out of these headwinds, the business continues to go from strength to strength.

Probably worth calling out, too, our senior roles and senior operational roles outside of Australia are often filled by expats. Our foreign workforce is largely nationals. So our operations in Africa, it's a national business. I guess 95% across the board with our employees are nationals. So the pressures that we're seeing here in Western Australia aren't the same global.

Right. And then I guess this is related to that spector. I mean, across the board, we are seeing all these commodity prices hitting new highs, particularly in Aussie dollars, I mean we're at all-time highs for pretty much every middle, most of the bulks. How is that translating into opportunities? I mean it seems like the miners are maybe slow to pull their CapEx lever here. But I mean, it would seem like on a 2- to 3-year view, the pipeline must be getting or looking like it is going to be significantly bigger, just by the fact that, again, miners haven't made these kind of margins basically ever. So that's flush with cash. And the market is telling them that they need to drive the supply response, which obviously means they need to spend some CapEx. So you said that your pipeline is largely gold and nickel now. But I mean, compared to where you were in February, I think you mentioned a number of 20% larger here. I'm just trying to understand what you're saying in terms of the opportunity set, albeit that, that opportunity set maybe is coming through into contract awards a bit more slowly than what you were thinking?

Yes. I think certainly, we are seeing the pipeline increase and positively, we're seeing the pipeline increase in the jurisdictions that we're targeting, North America and Australia, for that matter as well. But you're also right in the fact that we are seeing some of the projects that have delays in terms of the pipeline. And obviously, we -- at the -- or the impact of our clients in terms of when they bring the projects online. So we've definitely seen that increase. We're also seeing that increase sort of skewed towards underground, which is very positive, given our earnings out of underground. So we've seen that north of 10 bill now. And we'll give more detail when we do the full year results, but absolutely increasing. But you're right, there are some delays on it.

Okay. So I mean could you look at what you're seeing today with the obviously disappointing news? But if you looked across 2 or 3 years here and assuming that COVID normalizes and you get the right contract structures in place for labor like you did in the last cycle, it would seem to me that the outlook is actually, from a macro perspective, it is significantly better than what it was even a few months ago. Is that a fair way to characterize the current market dynamics?

Yes. Nick, I definitely like the articulation of that actually. I think that is a fair way. And I guess, subject to, obviously, as you've already called out COVID and tighter labor market, I think once we work through that and understand the longer-term landscape, and what we've navigated, the challenges to date, well, so whatever occurs in the future when it gets easier, we'll be well-placed. But certainly, our view is down the track we see positive on the backside of COVID and the labor shortages. And I guess the other item with our contracts is when we do see commodity prices increase, clearly, our clients benefit from that. Our contracts are structured so that we don't actually receive uplift from commodity prices. What I would also say is when you then see commodity prices come down, we're not seeing the impact on our contract rates because, again, they're not linked to commodity prices. So it's at times almost countercyclical. And we also target operating mines. We've shifted our business away from, I guess, the bulk being exploration, which is very cyclical, to more operating mines and also targeting mines that are on the lower end of the cost curve so we continue to operate. So certainly, we see positive outlook once we get through the current challenges.

Right. Well I mean, look, there's plenty of Australian miners that are trading at 30%-plus free cash flow yields at the moment. So I mean that cash is going to -- at least some of it, incrementally needs to go back into growth, you would think, given the margins where they're at. And then just one last question, which you may or may not be able to answer. Just in Botswana, did you tender on Sandfire's new work there for the T3 and A4 deposits?

Yes, Nick, we're still in the Motheo contract, surface contract. Yes, we have tenders on that, and we're currently in active tender with Sandfire.

Okay. So you're in the shortlisted -- I think they've said this shortlisted parties, you're one of those parties?

Yes. Yes, we are. We're still talking to them and working through and answering questions on a tender site. We're one of those parties.

There are no further questions at this time. I'll now hand back to Mr. Norwell for closing remarks.

Yes. Thank you, everyone, again, for joining the call and thanks for the questions that came through. I guess, just wrapping up, what I've said already, certainly headwinds. But as a business, we continue to execute the strategic imperatives, which is strengthening the business, albeit we're seeing softer operational impacts on the backdrop of those headwinds. But as, I guess, Nick particularly outlined, we do see the business will be in a very strong position once we get to the other side of the headwinds. Unfortunately, we're in the same boat as everyone else and we understand the crystal ball nature of the duration and the severity of those impacts, but we are well positioned for the future based on what we continue to do and the team we have in place. So thanks again for your time, and look forward to talking soon.

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