Perenti Limited (PRN) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Perenti Group HY '24 Results Presentation. [Operator Instructions] I would now like to hand the conference over to the company. Please go ahead.

Good morning, and thank you for joining the Perenti first half results call. My name is Mark Norwell, Managing Director and CEO of Perenti. And with me is Peter Bryant, our CFO. Moving on from our disclaimers and on to Slide 3. Once again, through the hard work and commitment of our people, we have delivered another set of record underlying financial results, and we are on track to deliver record results for the full year, underpinned by generating excellent free cash flow. Over recent years, we have continued to deliver on our 2025 strategy. We have addressed nonperforming businesses, grown in Tier 1 mining jurisdictions, rationalized the portfolio and at the same time, we have focused on embedding sustainability into everything we do. In addition, on the 6th of October last year, we finalized the acquisition of DDH1. We combined the 4 DDH1 brands with Ausdrill to establish our new Drilling Services division, which delivered positive earnings, supporting our record underlying revenue and profit. The diversification of our businesses across the Mining Services value chain, geographies and commodities, which now includes a much larger Drilling Services division, means that we are a truly diversified global business. We continue to focus our efforts on ensuring that the fundamentals of the business are robust, while improving managing risk and capitalizing on opportunities. In the first half, our high-quality projects and businesses delivered record underlying financial performance with revenue of $1.6 billion, record EBITDA of $312 million and record EBIT(A) of $149 million. Just to put this in perspective, in FY '22, we delivered $176 million of EBIT(A) and only 18 months later, we have almost delivered that number in one half. Our record EBIT(A) is up 10% on strong operational performance. If we exclude the impact of a provision we raised for Savannah, the business would have delivered $156.7 million of EBIT(A) at a 9.6% margin, which is very close to our 2025 strategy EBIT(A) target of 10%. Our NPAT(A) is up 20% on the prior period as a result of improved business performance and a reduction in our effective tax rate to 32% primarily due to the acquisition of DDH1. As per our forecast, leverage for the period was 0.9x due to greater capital spend in the first half and the $50 million of debt used for the DDH1 acquisition plus transaction costs. As we will discuss, and as previously communicated, our guidance for leverage at 30 June is between 0.7x and 0.8x. Furthermore, we are adding a free cash flow guidance metric for the full year with a very strong free cash flow in the second half. We expect that our free cash position at the end of FY '24 will be greater than $100 million. We are also confident in the outlook for the business beyond FY '24. In consideration of the record underlying results in the first half and a very positive outlook for free cash generation in the second half, the Board declared a fully franked interim dividend of $0.02 per share. In addition, the Board has also approved recommencing the share buyback subject to share price performance. These are tangible examples of the Perenti Board focused on returning capital to shareholders given the strength and resilience of our business. We have navigated challenges and still do. But at the same time, we have invested in the business to ensure a robust corporate structure coupled with a diverse and quality portfolio of mining businesses. This performance is testament to our people, not just their effort in the first half, but over many years, which is a nice segue to the next slide, Slide 4, who we are. It is our 11,000 exceptionally talented and highly skilled people that underpin the resilience and performance of our business. We operate across 12 countries, over 10 commodities and provide services to over 100 clients globally. And it's that deep global experience that has supported our recent growth into new jurisdictions and supports the continued success of our long-term operating regions. With our 4 divisions and 13 operating brands, we deliver services across the mining value chain that provides scale and diversity to successfully navigate through commodity and service cycles. We remain a globally significant underground mining service provider, and we now have scale in our Drilling Services division, operating the second largest drill fleet globally. Our largest project in our portfolio only contributes 6% of revenue. And in the Drilling Services division, our average contract generates $2.5 million of revenue. So whilst in recent months, it has been disappointing the 2 underground nickel projects in our portfolio have gone into care and maintenance, there was no impact on our guidance. Ironically, these 2 projects stopping actually represents an opportunity to transfer people and equipment to other projects within our global portfolio. Our underground fleet is consistent across all of our sites, meaning we generally use the same mining equipment in Australia, Africa and North America. So the circa $40 million of fleet written down value from Savannah and Cosmos is being sent to other projects to displace new capital by canceling orders. In some cases, we will also see increased returns from our redeployed fleet. For example, the fleet of Savannah was generating 0 EBIT margin. Therefore, when it is redeployed to other sites, it will generate positive returns. This redeployment of fleet is one of the drivers for the reduction in FY '24 capital guidance. As for the transfer of our people, our vacancy rates are now at all-time lows, given that we have successfully found positions for all of our employees who chose to continue within the business. As I said in the introduction, we have a business with very strong fundamentals. We have robust internal controls and governance structures. We have globally relevant scale. We are diversified, and we deliver sector-leading services. We have taken the time to get the basics right. We have outstanding people and our client base consists of many leading mining companies. We are confident that our business will continue to deliver value and certainly despite the ups and downs of the commodity cycle. Slide 5. As mentioned, our performance is underpinned by our 11,000 people, and there is nothing more important than their safety. In March last year, we announced the formation of a Safety Transformation Taskforce, comprising of internal leaders and external experts. The task force and associated working groups in Contract Mining and Mining Services are making positive progress against their transformation plans, although there is still more to be done. In this half, work will continue on the current plans. Drilling Services will establish a safety transformation working group, and we are progressing discussions with a global miner to establish a partnership to advance safety at the client and contractor boundary layer and more broadly across the industry. As we outlined in our strategy update in June last year, sustainability is becoming increasingly important to our employees, our clients, our funding partners and our investors. But aside from this, we truly believe that a strong focus on sustainability is absolutely the right thing to do, which will create enduring value for all our stakeholders. In support of our focus to embed sustainability into everything we do, last year, we introduced our sustainability imperatives and priorities. Since then, we have made significant and tangible progress within very meaningful areas. A comprehensive update on progress of the Safety Transformation Taskforce will be included in our 2024 sustainability report along with detail on our other sustainability initiatives. Moving to group performance. Slide 6. As outlined earlier, our first half performance, which include DDH1 since 6 October last year, was another record underlying result for revenue, EBITDA and EBIT(A) and we are positioned for a stronger second half to deliver on our FY '24 guidance. Our earnings would have been higher, but for the $8.2 million provision related to the doubtful receivables balance associated with the Savannah underground nickel mine, due to Panoramic Resources entering voluntary administration in November last year. If we normalize for this one-off, we would see an EBIT(A) margin of 9.6%. With our focus on debt, our leverage is trending in the right direction and will accelerate down towards 0.7x for FY '24. Later in the presentation, there is a slide that shows us deleveraging from circa 3x 9 years ago to a forecast of below 0.8x by 30 June this year, which is a great outcome, especially given the significant increase in revenue and EBIT. All in all, a very strong half and a stronger second half ahead. I'll now pass to Pete, who will give an overview of the financials.

Thanks, Mark. For those of you who are familiar with Perenti and have dialed into our results calls over the years, welcome back. And to those shareholders who joined the register following the bringing together of Perenti and DDH1, welcome to what is possibly your first Perenti results call. We've made some minor changes to the historic structure of the deck so that the initial focus is on the consolidated financial results. Once I've expanded on the key financial numbers for the half, I'll hand you back to Mark, who will provide some further commentary around the performance of the divisions and importantly, expand on the FY '24 outlook. Slide 8 provides the bridge from the underlying numbers, some of which Mark just presented, to the statutory numbers that appear in the audited half year financial statements. Importantly and pleasingly, the statutory EBIT, EBIT(A) and NPAT before the amortization of customer-related intangibles all reflect an improvement on the underlying numbers. Over the journey, Perenti has reported stronger statutory numbers on several occasions, so this is not a once-off event. But nonetheless, it's nice when it happens. I think the 5 categories of the reconciling items are reasonably straightforward. That said, I'll give some brief context to each of them. The provisional purchase price accounting for the acquisition of DDH1 has delivered a gain of $29.4 million, a positive outcome that I'll expand on shortly. Transaction and other one-off costs relate primarily to the acquisition of DDH1. Net foreign exchange gains reflects the requirement of the accounting standards for us to mark to market several balance sheet accounts. For clarity, this amount does not reflect the impact of exchange movements on the profit and loss. It reflects balance sheet account movements. idoba product development for the half was $7.3 million. Finally, we have the net tax effect of the non-underlying adjustments. Moving to Slide 9. As I just mentioned, Perenti booked a non-underlying provisional gain on the DDH1 acquisition of $29.4 million. Firstly, purchase price allocation is the term given to the process of accounting for a business acquisition by the relevant accounting standards. When a business is acquired, the purchase price allocation process requires that the assets and liabilities of the business acquired must be restated to their fair value. For assets like plant and equipment, independent third-party valuations must be obtained to determine the fair value. The external valuation undertaken on the DDH1 plant and equipment resulted in an increase in the value of those assets of $48 million. Or put slightly differently, Perenti acquired those assets for $48 million less than their fair value. Similarly, all the other assets and liabilities of the business acquired are reviewed and adjusted to reflect their fair value. The difference between this $48 million uplift and the provisional gain recorded in the accounts of $29 million relates largely to everybody's favorite subject, tax, and more specifically, tax effect accounting. There are various components to tax effect adjustment with the largest relating to the fair value uplift of the plant and equipment. This uplift is effectively nondeductible for tax purposes, which together with other less material adjustments, gives rise to a $15.5 million purchase price allocation tax adjustment. I've tried to simplify the drivers of the gain, but it is a tad complex. To this end, there is further disclosure in the half year financial statements. I should also highlight the use of the word provisional. Given the complexity associated with accounting for acquisitions, the relevant accounting standard provides a 12-month window for purchase price allocation to be finalized. Thus, the numbers are provisional. Moving on to Slide 10, DDH1 integration and synergies. In the simplest of terms, it's going very well, and we are on track to deliver the P&L and cash synergies that form part of the deal rationale. Having been through a few acquisitions and integrations over the years, I can honestly say this has been the best. When I look at the drilling division today, under Sy's leadership, it's hard to believe that it's only been part of Perenti since October last year. Ausdrill has seamlessly transitioned into the new drilling division, and the DDH1 businesses have seamlessly transitioned into Perenti. This is due in part to the Perenti operating model, which was designed to facilitate the expansion of our portfolio through acquisitions. But equally as important has been the alignment of the cultures and the quality of people in both businesses. To some extent, the timing of the acquisition in the context of the integration was perfect. The deal closed a week or so prior to Perenti's annual senior leaders conference, which sees the top circa 50 leaders of the group come together. This timing meant the DDH1 leadership team were able to attend the conference, meet all the senior leaders of the Perenti Group and immediately form relationships, relationships that clearly contributed to the success of the integration. The delivery of identified synergies is on track, and Sy and his team working closely with the other divisions of Perenti, are now focused on identifying additional operational upside. Slide 11 reflects the statutory cash flow of the group for the first half. Whilst the operating cash flow after capital for the half may look lower than expected, the result for the half was above our internal forecast. And as Mark called out on the initial slide, we are guiding to free cash flow after net CapEx, interest and tax for the year to be greater than $100 million. There are a number of quite significant movements when you look down the elements of the cash flow. Several of which were driven by the acquisition of DDH1 in October. Specifically, if you look at the second last bullet point, you'll see $50 million cash consideration paid to DDH1 shareholders, $24 million for the payout of DDH1's finance facilities, and $11.6 million in transaction fees payable to advisers, lawyers, accountants and bankers acting for both DDH1 and Perenti. The remaining bullet points on the page explain the key balances. For completeness, I note that statutory cash flow from operations is after our investment in idoba product development. Ladies and gentlemen, I'll now hand you back to Mark.

Thank you, Peter. Now to our divisional performance, starting with Contract Mining underground on Slide 13. As we expected, our underground mining business delivered another solid period with revenue growth across all regions. However, EBIT(A) was down slightly due to the provision taken for Savannah and a couple of African projects down in scope, namely Yaramoko in Burkina Faso, and some expansion challenges at Zone 5 in Botswana. Additionally, in line with the updated contract terms for Subika where Newmont now provide all the fleet, and therefore, as a natural consequence, earnings are down slightly compared to prior periods when we owned the fleet and received a return on that fleet component. The items I've outlined delivered margins 11.1% although if we normalize for Savannah, we would have seen the margin at circa 12%. Positively, we are in discussions with Zone 5 in relation to contractual rate revisions and are expecting a positive outcome in the near term, which will support a stronger second half. Slide 14, surface mining. In the first half, with the establishment of the Drilling Services division and the inclusion of Ausdrill, their contribution to the surface mining segment has been removed. What immediately stands out on these graphs is the performance of the first half of 2023. However, for context, this includes an $11.3 million retrospective rate adjustment for works completed at Iduapriem in prior periods. Whilst first half performance is better than FY '22, the performance is still down on our targets. Looking to the remainder of FY '24, we expect that the second half will deliver stronger earnings and margins compared to the first half as Motheo A4 in Botswana ramps up and as our other 4 projects perform in line with contractual expectations. We still believe that a long-term average margin of greater than 10% is appropriate for our suite of surface projects and the team are focused on delivering this outcome. Slide 15, Drilling Services. This slide demonstrates some of the value that we outlined when we announced the DDH1 acquisition. While the division is new in our reporting suite, we have nearly 4 decades of experience in the drilling sector and now operate the second largest fleet of drill rigs in the world. The newly formed Drilling Services division has performed as we expected. As you can see, historically, Ausdrill has delivered relatively consistent earnings, albeit at lower margins than DDH1. With the inclusion of DDH1 since 6th of October, revenue increased by $130 million and earnings increased by circa $15 million compared to the first half of '23. We are encouraged by the performance of the Drilling Services division with the objective to deliver margins above 10% for FY '24 and beyond. Slide 16, Mining Services. In the first half, our Mining Services businesses delivered very strong results, driven by strength across BTP and Supply Direct, partially offset by the technology product development of idoba. BTP remains the largest contributor to Mining Services revenue and in the first half delivered increased utilization of its fleet and increased part and fleet sales. The improved performance more than offset the earnings impact of idoba. Moving to our outlook on Slide 18. As I said upfront, I want to reiterate, given the relative stability of our contracts and the nature of the work we complete, we have good visibility over the forecast performance of each of our projects and businesses. With the inclusion of DDH1 into the business for 3 months in the first half, Naturally, there is a second half positive increase to earnings. With cash outlay in the first half of the DDH1 acquisition, combined with front-end weighting of our annual capital expenditure, strong free cash flow will be delivered in the second half. So just to be clear, our second half will be stronger than the first half with a significant step-up in cash generation to over $100 million. We are confident in our FY '24 guidance, and we look forward to delivering on these commitments. On to Slide 19, which demonstrates our track record on delivering on our earnings growth. I want to take our track record back 10 years to demonstrate the Barminco acquisition fundamentally changed our business for the better. And other than the impact of COVID and cleaning up AMS challenges in FY '21 and FY '22, Perenti has gone from strength to strength. These charts demonstrate our track record of delivery. Since the Barminco acquisition, we have more than doubled our revenue, almost doubled our EBIT and at the same time, we have reduced leverage by circa 60% with the result more than half that of the business in FY '15. When we delivered our 2025 strategy in 2019 and updated again in 2022, we called out fundamentally improving the business, which clearly we have done. Whilst we are positive about the performance, we are also focused on further improvements, and significant improvements of that, across all aspects of the business. We recognize that there are external factors that impact sentiment, but these metrics show how robust our business really is. There is strong demand for our services, and we are confident that the business is well positioned for the next phase of the evolution of Perenti. This next phase will be explained further when we deliver our 2030 strategy this year, and we expect to cover off on how we will drive further operational performance improvements and generate consistent free cash flow and reduce gross debt, how we will be re-weighting the portfolio to reduce risk and recycle capital, and where we are positioning Perenti to take advantage of the significant future mining opportunities that we have identified. Once again, and on behalf of the Board and Group Executive, I'd like to thank everyone at Perenti for their commitment and contribution throughout the half. I'd also like to thank our clients and shareholders for their ongoing support. Thank you, and we'll now take questions.

[Operator Instructions]. The first question today comes from Matthew Chen from Moelis.

Just a question on the margins in Contract Mining, if you could. So I just wanted to clarify that your expectations in terms of the EBIT(A) margin in the underground part of the Contract Mining, that's kind of -- what are those expectations going forward? And how soon are you going to get to like that 10% margin target in the surface part of the contract?

Yes. Thanks, Matthew. So firstly, with the underground, it's called out the first half that the impact associated with Savannah, the minus $8 million, that obviously might continue into the second half. So automatically, we won't have that downward hit, so we will see a step-up. We are expecting that those margins will get back to the circa 12% that we've had historically. A couple of the other items there, just the ongoing, I guess, sort of ramp up with Zone 5 and also working through the rate negotiations that we called out that would see a step-up there thereafter, and also the 2 other items I mentioned regarding margins, which we had the first half -- and this is the first half that Subika equipment has all gone to Newmont. So the return on capital is excellent for that project. But given we don't have margin associated with the ownership of the fleet, we've seen that come off with generating good cash. So in terms of the underground, we see a stronger second half for underground performance. As for surface mining, this is now only the AMS component, given Ausdrill has transferred into Drilling Services. We are looking for that to improve in the second half as the Motheo A4 project ramps up, which was awarded last year. So it's T3 and A4 now, so we expect that to continue ramping up in this half and into the first half of '25 as well. As for when we get to the 10% margins, we'll be looking for that into FY '25 at the back end. So we'll see progressive improvement in this half, Matthew, but it won't get 10% into future financial years.

Great. That's really helpful. I just wanted to ask about your revenue by commodity, noting that as nickel has 12% exposure in first half '24. Are you able to quantify what that looks like going forward, given the call-outs on Cosmos and Savannah?

Yes, sure. So as you called out, when Savannah and Cosmos were included, we had circa 12% of our revenue associated with [indiscernible]. Taking out those 2 projects has it down to circa 8%, and that's predominantly with Nova and Spotted Quoll. And a percent of that is associated with work with the drilling division, which is predominantly BHP Nickel West.

Okay. Are you able to quantify what the kind of splits there? I suppose that Nova has probably a lion's share of that as against to Spotted Quoll part?

Yes, your assessment is right there, Matthew, in terms of -- Nova's the larger component as per sort of splitting down to each project and its revenue base might get into that level of detail, but your assumption there is spot on.

[Operator Instructions] The next question comes from William Park from Citi.

Firstly, I've just got a couple of questions. Firstly, just on idoba, how much more do you have left to grow? I mean, presumably, it's still $15 million for this fiscal year, but just wondering how you're thinking about, I guess, the development cost with respect to idoba beyond FY '24, please.

Yes. Thanks, Bill. In terms of idoba, you called out the $15 million is right. We're just slightly down on the -- that annualized spend in the first half of $15 million is what we're targeting, which we're expensing. And I will call out that when we mentioned the free cash flow generation and grow the $100 million, that is all the expense of idoba's already done. This is a very clean free cash flow after all expenses, so that's all taken into account. So just to be clear on that. As for FY '25 guidance, we'll -- at this stage, we might be putting out further-looking projections for idoba or any other part of that business. We will be providing that in due course when we release FY '25 guidance, but the $15 million is what we're on track for, for this year.

And just on your expectation of free cash flow, I don't know whether this was covered in the call, I jumped on late, my apologies. Just on your free cash flow expectation of over $100 million, can you just step through how you're sort of getting there? Because if you're guiding for EBIT of circa $315 million at the lower range and then CapEx of $350 million, so I'm just trying to understand what the sort of delta -- the moving parts after that, please?

Yes. So in terms of that free cash flow guidance of over $100 million, that's after all interest costs or tax cash costs or stay-in business capital or growth capital. So all of that is taking into account with that number. So as I mentioned, it's a very clean number. Pete, anything to add there?

That history certainly includes idoba, and we're assuming a 90% cash conversion, which historically for a full reporting period was comfortably achieved, Will.

And just one last, if I could squeeze in one last one. Just in terms of how you're approaching guidance, would it be reasonable to assume that you're taking a pretty similar approach to the approach that you've taken in FY '23, where you'd like to see some upside before updating the market with guidance, potential upgrades to guidance and so forth? Just wondering how you're sort of approaching providing guidance to the market. Are you trying to be more conservative this time around to see if there are any upside in the near-term horizon?

Yes. Thanks, Bill. We always welcome upside to our guidance, of course. The approach we take is the same every reporting period. We run a very rigorous budgeting and then forecasting process within the organization across each of the divisions and corporate. We also run a risk and opportunity across the organization to end up with the guidance and the range. We clearly stand by it, given we've reaffirmed guidance. If we see upside sort of come through, then we'll share that with the market as per our disclosure requirements. But we're confident about our guidance, hence putting it out.

[Operator Instructions] At this time, we're showing no further questions. I'll hand the conference back to Mr. Norwell for any closing remarks.

Thank you. And thank you, everyone, for taking the time to join our call, particularly those in Perth for the early start. As outlined with our 10-year charts in the deck, we continue to deliver improved results, at the same time, reducing leverage. So we're very well in place to deliver further in ongoing value for our shareholders. So once again, thank you, and enjoy the remainder of your day.

Thank you. That does conclude our conference. Thank you for your participation. You may now disconnect.