Perenti Limited (PRN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Perenti Global Limited HY '22 Results Presentation. [Operator Instructions] I'd now like to hand the conference over to Mr. Mark Norwell, Managing Director and CEO. Please go ahead.

Good morning, and welcome to Perenti's First half FY '22 Results Call. My name is Mark Norwell, Managing Director and CEO of Perenti, and with me today is Peter Bryant, our Chief Financial Officer. Starting on Slide 2. At a consolidated level, our first half result has slightly exceeded our expectation, and we are very pleased with our progress to deliver our full year FY '22 earnings guidance. Revenue was up at $1.2 billion, driven by a range of factors, including the commencement of several new projects, further ramp-up of our growth projects and scope growth on existing operations. Despite our strong revenue growth, we delivered a reduced operating margin due to cost escalation, supply chain constraints, border restrictions, the very tight labor market and project ramp-ups. I am, however, pleased to say our earnings remain slightly ahead of expectations. Moving to our cash collection and balance sheet. We are very happy with our cash conversion at 94%. This is the fourth consecutive reporting period where our cash conversion has been above 90%, which is a great example of the focus our team places on cash management. At the end of the half, our leverage was 1.3x, which was lower than forecast due to stronger than forecast cash conversion and equipment that was scheduled to arrive in December, being pushed out into January due to the global supply chain challenges. So overall, given the macro challenges, the business has delivered a sound result. On to Slide 3. Beyond the headline numbers, we continue to deliver operationally and execute our strategy as we position the business for the future. Despite a very tight labor market, we were able to expand our employee base by 13% as we welcomed an additional 1,000 new people across our business to meet the needs of our growth and project ramp-up requirements. With our additional people, we delivered strong underground revenue growth which offset some of the margin compression due to cost escalation, supply chain issues and labor shortages. We also continue to deliver enhanced surface performance underpinned by further improvements in AMS, and we continue to execute our strategy throughout the half. We signed a partnership agreement between Sumitomo and idoba, under which we will work together on digital mine optimization and carbon emission improvement opportunities, and we also finalized 2 complementary acquisitions, which totaled less than $10 million. Although I would note that whilst the work was done in the half, the agreements weren't finalized until just recently. The partnership and acquisitions are supportive of our idoba strategy to build complementary core capabilities within time, we'll deliver new technology-enabled products and services. As previously communicated to the market, we liberated over $85 million of cash through the divestment of MinAnalytical property and small equity holdings, overall an excellent outcome. And in support of our strategy, we formed a Board Sustainability Committee and continue to focus on safety improvements. We are also positioned very well for the future. We have $5.7 billion of work in hand, and a pipeline of $9.5 billion. We released our capital management policy, and we are finalizing our revised strategy, which we plan to release this half. In short, our team are executing very well despite the headwinds. We continue to execute our strategic plans, and we are focused on the future to deliver sustainable returns. Slide 4, safety and sustainability. This is an area of critical importance at Perenti. We continue to invest in safety resources and programs to improve safety performance and sustainability is a key component of our strategy review, as we look to evolve our business in support of delivering improved outcomes to all stakeholders. Firstly, on safety. As outlined during our FY '21 results call last August, it was with deep sadness that on 12th of July, we lost our colleague, Troy Cameron, at the Hemlo mine in Canada. Our support and thoughts continue to be with Troy's family and friends. We have completed the joint investigation with our clients and have addressed many of the findings from the investigation, specific to Hemlo and where applicable across our business more broadly. We continue to focus on improving safety through the organization. And with so many new starters within our business and the industry, that focus is absolutely critical in keeping current and new people safe. Pleasingly, despite the significant labor constraints, we employed 1,000 more people into our business during the half, and we are still actively recruiting more employees to support our operations. As I mentioned earlier, sustainability is an important focus for the industry and clearly a focus for myself and the team. We established the Board's Sustainability Committee with Tim Longstaff as the Chair. During the period, we released our position statement on eliminating sexual harassment in the mining industry, and in support of this statement, we released our "It's NOT ok" campaign. We also progressed our road map towards decarbonization and continued our participation in the electric mine consortium. Slide 5, continuing to deliver on our 2025 strategy. Whilst we are currently completing the review of our strategy, we have made significant progress on all 5 strategic pillars. I've already touched on the key areas of operational excellence, organizational health and technology-driven future. So I'll briefly cover strategic growth and then take some time to talk about our financial capacity. As outlined last year, our strategic review is focused on strengthening our approach to capital management and allocation, reviewing our current portfolio of services, regions and businesses, optimizing our business performance to increase generation of free cash flow and utilizing technology and data to develop capital light businesses. In addition, we continue to focus on improving foundations of our business, which has seen an overhead increase in prior periods. However, this investment is critical in supporting our future. Whilst it is important to invest in our business foundations, cost management remains a focus across the business, including updating our cost allocation principles, which I'll talk to later in the presentation. We'll cover our financial capacity pillar on the next slide by focusing on capital management. Slide 6. In December last year, we released our capital management policy to the market. The policy is underpinned by the alignment of our projects and businesses to focus on generating greater free cash flow. With this, we then provided an outline of how we will prioritize that cash. We will be prioritizing our cash allocation to support leverage reduction with a target of 1x in the medium to longer term, although we will keep an eye on value-accretive opportunities, as we also focus on decreasing our leverage. Our recent corporate activity has been in accordance with our policy. Late last year, we divested MinAnalytical and an underutilized property asset. We also divested some corporate equity, which was related to historical drill for equity positions. These activities liberated $85 million of cash and delivered an NPAT of $29 million. This cash will be recycled according to our capital management policy, principally reducing leverage. As part of capital management and as announced late last year, our dividend policy has been amended to support leverage reduction. Therefore, the Board has declared that no interim dividend will be paid this half. We will also look at our balance sheet and continue to identify opportunities to retain balance sheet strength and flexibility. We will look at growth through the lens of capital light opportunities. But as we have recently demonstrated, we will actively manage our portfolio. In addition, we will evaluate the opportunity for share buybacks where appropriate. The actions we are taking under the capital management policy, along with our revised strategy, will in time, improve our margins, generate stronger cash flow and create balance sheet strength and flexibility to deliver improved shareholder value. Slide 7. I'll now step through business performance at the group level and then into each segment; underground, surface and investments. Slide 8, underlying group performance. Earlier, I mentioned we have stabilized our overhead costs, as we continue to invest in our business foundations, and we have updated our cost allocation principles. We have reallocated current and historical group cost items to the relevant operating segment from which they were generated. This is to more accurately reflect like-for-like performance both historically and going forward. So you will see our historical earnings restated in this presentation. By way of example, employee bonuses were included in our overhead costs. Now they are allocated to the home cost center of the employee. So this isn't about making the numbers look better. It's about accurate reporting and management. On to the results. At a consolidated level, revenue was up 18% as a result of our growth projects, scope increase at existing mines and some pass-through of cost increases. EBIT was in line with our expectations and supports our full year guidance. Pleasingly, our revenue is now 57% from Australia, Canada and Botswana, which is up 5% on the last half. We have specifically called out securing work in Botswana and Canada, given they are excellent jurisdictions to operate. We now have 2 projects in each country, which is a credit to our team to be able to execute our strategy throughout the global pandemic. We are also realizing an increase in revenue from commodities that are critical for electrification and decarbonization. Slide 9, underground. Our underground business delivered strong revenue growth, driven by the ramp-up of Zone 5, Savannah, Cowal and our Canadian projects. EBIT was off 1.8% due to macroeconomic margin compression, growth projects and the shifting of earnings to a lower risk and therefore, lower margin regions. The largest area of compression was felt on our Australian underground projects, particularly Agnew and Dugald River. Across the rest of the underground projects, I am pleased they delivered consistent earnings versus the first half of FY '21, while our Canadian projects delivered a 50% increase in earnings, albeit from a relatively low base. The ramp-up of Zone 5 is progressing, but earnings have been impacted by COVID-19-related labor issues. Looking at the remainder of FY '22, we expect to see improved performance across our Australian projects, as cost increases flow into our rise and fall calculations. In summary, our underground business continues to perform well despite the macroeconomic related margin compression. On to surface, Slide 10. This slide speaks for itself. As you can see, since the announcement of the implementation of our AMS strategic findings, we have seen our AMS business deliver incremental and sustainable improvements with the third consecutive period of earnings growth. Despite COVID-19 related operating challenges, the Australian business, which consists of exploration drilling and drill blast continues to perform well. In the second half of FY '22, we expect to see further improvements in the surface business on the back of another AMS earnings increase, underpinned by the ramp-up of Motheo and Iduapriem. While earnings are still not at the level we are looking for, I'm extremely pleased and grateful to the surface team and support team members more broadly. Slide 11, investments. As I mentioned earlier, idoba was reallocated from group costs into the Investment segment. Therefore, current and historical results have been restated. As you can see, the investments business delivered revenue growth related to idoba, but also from stronger demand from MinAnalytical services and BTP is slightly ahead of previous periods, but with a strong sales pipeline to deliver growth in the second half of FY '22. From an earnings perspective, we saw solid earnings performance across BTP, MinAnalytical, as well as well control solutions, supply direct and logistics direct, driven by stronger pricing environments and improved productivity. FY '22 continues to be a year of growth and investment with idoba as we embed the acquired businesses as well as build the structures that will underpin longer-term earnings growth. The businesses that make up idoba, Sandpit, ImpRes and Optika are performing well and are delivering consistent profits. The EBITDA loss for idoba is related to the strategic investment in product development technology and corporate governance requirements. In the second half, we expect earnings to be similar or slightly above the first half as the improvements driven by a stronger sales pipeline from BTP will be partially offset by the divestment of MinAnalytical. Slide 12, and I'll now hand over to Peter, who will step through the financial results in more detail.

Thank you, Mark, and let me start by also welcoming everybody to the call. I was hopeful that over the coming days, we would be meeting face-to-face with many of you, but unfortunately, that's not the case. Let's hope with last week's announcement that the WA Border is opening after circa 2 years, we can meet face-to-face in the near future. As Mark said, we are presenting numbers that are slightly ahead of our internal forecast for the half. Revenue was up, EBIT was up and leverage was better than expected. By pretty much all businesses, particularly in the resource sector in WA, we've seen some upward pressure on our cost base. But despite this cost pressure, we achieved an absolute EBIT number that was slightly better than our forecast. The cost pressures are real, but as borders open and supply chains improve, we anticipate this cost pressure will moderate. In the second half, we will also see the positive impact of our Horizon 4 provisions, which will provide some relief. Against this backdrop, I see a real opportunity for margins to improve. Moving to Slide 13. I won't provide any commentary on EBIT as it's been well covered already. Our profit before tax or PBT for the half was $53.6 million, reflecting an interest expense of $23 million, which is consistent with the expense recorded in the prior half. I'll talk a bit more about the debt structure and leverage in a couple of slides. Although not directly evident from the slide, our effective tax rate was stable at 31%. So with interest and tax expense stable for the half, we delivered an underlying NPAT A of $34.9 million. Our statutory NPAT A, the bottom line of the table, was $41.5 million, which was $8.2 million greater than our underlying number and compared to the prior corresponding period was up $86 million. It's always nice to be able to report a statutory result that is above the underlying number. Moving on to the next slide. It's a pretty clear reconciliation -- sorry, pretty clean reconciliation. The 2 adjustments of note relate to the very successful sale of MinAnalytical and our exit from the Sukari contract. As announced last December, we were successful in selling MinAnalytical. This transaction, which generated circa $43 million of cash into the business, also delivered an accounting gain to Perenti of just shy of $30 million, which is yes, if you do the math, it was a great return on our investment. For those who aren't aware, MinAnalytical was a pioneer business in the utilization of photon assay technology developed by Chrysos. Of note, we continue to hold a reasonable investment in Chrysos and see some real upside in the coming months. On the other side of the ledger, we booked a $23 million expense related to the noncash impairment of customer-related intangibles. So what does this mean? When Barminco was acquired back in 2018, the difference between the book value of the assets acquired and the amount paid was reflected as an intangible. Intangible had an element of goodwill and an element that represented the estimated value of the contracts that were required. This is called the customer-related intangible. The customer-related intangible was then amortized over the estimated future life of the contracts or the relationships. One of the contracts that was acquired was Sukari. With our underground business exiting Sukari at the conclusion of the most recent contract, we were required to write off the unamortized balance of the customer-related intangible that was attributable to that contract. Other than these 2 items, I've just -- sorry, other than these 2 items I've just run through, there are no material adjustments between the underlying and the statutory result. Moving on to the cash flow, which is presented on Slide 15. Markets called out the cash flow conversion, which at 94% was above our internal target. I won't run through every number, but I will call out a couple. Cash tax at $35 million is notably up. As a global business, managing our global tax affairs is front of mind, but we are equally as mindful of our obligation to the country in which we operate and our desire to be a good corporate citizen. Against this backdrop, the step-up relative to the prior corresponding period is largely due to the payment of an additional $4.5 million withholding tax related to the payment of dividends from foreign operations back to Australia. Stay in business or SIB capital was just shy of $100 million, which is 8% of revenue. As you will have heard us say before, we generally see stay in business running at around 10% of revenue, which is aligned -- which intern aligns to the depreciation. Growth capital is called out in the bullet points and relates mainly to Motheo, Zone 5 and Iduapriem. Finally, on the positive side, as you've already referred to, we generated cash inflows of circa $78 million from the sale of land and buildings in Perth Metro area and the disposal of MinAnalytical. Slide 16 gives an overview of our debt stack and some of the key credit metrics. The structure is unchanged. And the only point I'll make relates to leverage. Leverage for the half was 1.3x, which was consistent with the prior period, but better than the guidance we provided late last year. To reiterate Mark's earlier comments, this improved leverage flow from a better-than-expected cash flow conversion at 94%. We had forecast 85%, coupled with capital spend that was deferred due largely to supply issues or slippages. That's it for me. Once again, thank you for joining the call, and I'll hand it back to Mark.

Thank you, Peter. Now on to near-term priorities and outlook. Slide 18. All-in-all, it has been a very busy few years and the first half of FY '22 was no different. But looking ahead, there are several catalysts that we expect to deliver on in the short and medium term. As we have stated previously, in the second half of FY '22, we will provide the market with our updated strategy. As outlined at our AGM in October 2021, our updated strategy will incorporate the principles of our capital management policy and we'll allocate capital to the most value-accretive opportunities and through technology, data and leveraging our deep mining capability, we will seek to optimize the performance of our projects and businesses to maximize the generation of free cash flow. We will prioritize leverage reduction to our target of 1x in line with our capital management policy, although we will still be on the lookout for value-accretive growth opportunities. In addition, we will continue to review our current services, regions and businesses to ensure our portfolio is optimized to deliver sustainable improvements in shareholder value in the short, medium and longer term. And our strategy, we'll outline our broader sustainability road map, including a focus on decarbonization. Slide 19, priorities and outlook. In the near term, we will continue to focus on delivering excellence across all projects while working to successfully ramp up our growth projects. In the underground business, we expect to see a stronger second half predominantly from our Australian projects as improved rates is generated through the rise and fall mechanisms and easing of labor constraints. In surface, we have forecast to see an incremental improvement in the second half as Motheo is expected to start underpinning further revenue and earnings growth. We expect to see marginal growth in earnings from BTP. And in idoba, we will continue to collaborate with Sumitomo while also welcoming our newest team members from [Indiscernible]. We have increased our FY '22 revenue guidance whilst maintaining our EBITDA guidance given the ongoing macro challenges. We now expect to deliver revenue of between $2.2 billion and $2.4 billion with earnings of between $165 million to $185 million. Thank you, and we'll now take questions.

[Operator Instructions] Your first question comes from Nicholas Robison from Jefferies.

[Technical Difficulty]

Apologies. We will attempt to get back in touch with Nicholas. For now, the next question is from Andrew Donlan from UBS.

Just the first one on the underground margin, just the 10% versus the second half of '21. Is it fair to assume that, that's just primarily Barminco in Australia? And AUMS has been stable? Or how should we think about that margin?

Yes, Andrew, Mark here. Thanks for the question. Yes, your assumption is right there. Certainly, we've seen greater challenges within the Australian market while the borders are closed, et cetera. Offshore, the team continue to navigate the challenges well given that they've had 2 years of it now. So that's the right assumption.

And just on the second half recovery, I mean, you talked about some of the rises and falls. Is there anything besides just the mix as you change regions and stuff, is there any sort of structural element? Can Barminco get back to sort of the historical margins it's done over time or...

Yes. So you mentioned about the difference in mix. I think that's a key point there, Andrew, as we sort of move into better jurisdictions, if you like, or risk jurisdictions such as Canada or Botswana, we will see a margin that would be in between our Australian margins, and I guess, our West African margin. So we'll see some change to the blending of the portfolio and the weight in of the portfolio. As for the Australian operations, we've got a stable team. We've got long-term operational experience with the mines that we're at. We do expect to see those margins improve as the operating conditions around supply and labor improve into hopefully the near-term future, and we expect the West Africa margins to remain stable. So we see upside as the conditions improve.

Right. And then just on Sukari and some of the asset sales and things like that, are there other opportunities in West Africa, I guess, for some of these sales or moving to an owner-operator model or with Sukari more just like a one-off at the moment?

I guess, if we think about Yanfolila, what we did in the previous financial year, we are exiting that project asset sales, now it's Sukari, we are looking at a broader strategy, as we've outlined today and previously. We will look at opportunities that make sense to recycle capital into areas that support our ongoing strategy. So I wouldn't say it's a one-off, Andrew, but we will be quite selective and focused on what makes sense for our shareholders with our move and also ensure we support our customers through any transition that may occur.

Your next question comes from Nicholas Robinson from Jefferies.

Can you hear me?

Yes.

Sorry about that before. Just on border issues, could you give us an update on how this has impacted your operations and the outlook for and maybe [Indiscernible]

I think it's really hard to hear you. I picked up the first part, which I think was around COVID and the impact of operations, but I missed the second part. Can you please repeat?

Yes. So the impact of COVID on your operations this quarter and the outlook for 2H and maybe setting for both surface and underground.

Sure. Okay. So I assume if you're talking about this quarter, you're talking January, February, March, I guess, to date, we've continued to see the same sort of challenges that we had in the first half. Obviously, the signs is sort of more positive with the West Australian borders opening, and we're hopeful that supply chain starts improving. The impact between Australia and offshore is very different in terms of how that plays out. But in terms of how the team are going, we're still on track for what we've called out in this presentation and previously for our full year guidance. So we are seeing the improvements flow through as we had anticipated maintaining guidance.

And just on the growth project, would you mind [Indiscernible]

Sorry, Nicholas. Can you repeat that again, please, due to the background noise?

Just on the growth projects, would you mind giving us an update whether they've all been mobilized and ramped up, et cetera?

Yes, sure. So I'll start with the growth projects in Botswana, firstly, Zone 5, which we've been operating for some time and a very significant scale project that, that ramp-up continues. There was impact in the half just gone regarding COVID challenges as the Omicron variant change conditions with the team continue to progress and progress that well. We also allocated some of our team that came out of Sukari down to Zone 5 to support the ongoing ramp-up of that project. So that's continuing well. The other project in Botswana is the surface project, Motheo, the team commenced mobilization and early works at Motheo in the half, and they're ramping that up as we speak and on track for mining into this second half or mining operations beyond just the initial prelim work. The team in terms of the leadership team, we've had our in-country operations manager employed for some time. And through previous contacts, we have the management team in place for Motheo. So feeling very positive about that, the team in place, the gear in place and early work. So that's continuing. If I move across to Canada, we saw improvements increase in Red Chris mine with Newcrest during the half, and that ramp-up is continuing. So that's progressing well. And then the other project that we started in the half of scale is Iduapriem in Ghana and AngloGold Ashanti and that ramp-up is also progressing well. So in short, Nicholas, ramp-up projects are on track.

And sorry if this was before, but the top end revenue guidance looks pretty achievable with the growth projects coming through. What are you expecting for margins in underground for the group generally? Just trying to understand the moving parts that need to happen for you to invest through.

Sure. So in terms of the revenue guidance, and then I'll go to the EBITDA guidance. Clearly, we're generating $1.2 billion in the first half. We are confident about the second half revenue guidance. We have maintained our EBITDA range for the full year that will require a step up in the second half as we've called out previously. We're confident of that. And part of that step-up is the growth projects. But in addition, we are also factoring seeing a slight uptick in percentage margins as well. The only caveat that I put on all of that, Nicholas, is around the broader macro environment. Whilst we've seen positive signs coming through regarding borders, et cetera., I guess, what the last 2 years have shown us is that COVID can throw up field challenges. So there's still that uncertainty that exists globally. Hence, why we've maintained the range for EBIT, but reflected the revenue growth. So we see some improvements coming through in margins in the second half.

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

Thank you. And firstly, thank you for taking the time to join the Perenti results call. As everyone is aware, the market conditions have been challenging. And for a global business, I'm extremely proud that our team has been able to deliver record revenue, EBITDA in line with our guidance and continue to progress key strategic initiatives. Whilst we still have some macro challenges to navigate, most of these challenges start to ease globally, with our record revenue, we will see additional margin pull-through along with contribution from our new projects. We've had our fair share of challenges over the last 3 years, but in short, we continue to deliver now. We are positioned for the near-term strong performance as conditions improve, and we continue to focus on and invest in our long-term future. So thank you again, and have a good day.

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