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

Thank you for standing by, and welcome to The Environmental Group Limited First Half Year 2025 Financial Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Jason Dixon, CEO. Please go ahead.

Hi everyone, and welcome to the call. It's obviously a first half financial results presentation. I'm also joined by Paul Gaskett, Chief Commercial Officer; and Andrew Bush, our Chief Financial Officer, if you have any financial questions. I'll run you through the result, hopefully over the course about half an hour, and I'm happy to answer questions live on my screen or at the end, whatever you prefer. So results highlights, I actually thought it was a pretty good result myself, I fully acknowledge we had the $1.2 million one-off within Baltec, but at the same time, purely organic growth in revenue actually grew 16% for the period up to $54 million. If you took away the $6 million or $7 million, that's no longer in the lithium sector that we used to earn before that sector collapsed, we're actually up about 23% in organic top-line growth, which is a great outcome. Obviously, we're disappointed with the EBITDA number. As I said, due to that $1.2 million Baltec issue. I think what you need to bear in mind, though, is put that $1.2 million back, you're at $5.1 million at the same time, as I clearly identified to the market, we're going to invest heavily in Tomlinson's growth in this period as well and we spent nearly $400,000 on training. So that result is obviously far stronger than what it appears on those raw numbers. Now, $8 million cash in hand, which is terrific to help grow the business and no change to our guidance of about a 10% to 15% increase in EBITDA for financial year '25. I'll take you through the individual operating units, very pleased with 2 of them, once again, not pleased with the error within Baltec, that to achieve top-line growth of nearly 85% in this type of business, an absolutely extraordinary result, up to $19.7 million in revenue. You can see the EBITDA lag up $14.9 million, add back the $1.2 million that you see an incredibly strong numbers at very good margins. Again, unfortunately, an error didn't allow it to be achieved. Full process review has been completed. Appropriate measures of controls have been implemented and completely expected to be a one-off incident. Noise attenuation continues to be a growing industry issue and our technology in silencers work with the only ones that can last the life of peaking load turbine continues to be a big advantage for us in the market. A pipeline for sales growth remains particularly strong at this point in time. You're all well aware that the demand for peaking power to work in conjunction with renewables is now, I guess, unquestionably needed by the market. I guess 5 years ago, people would have been saying, well, it's all going to be renewables and it's going to be net-zero and we're going to achieve this by these target dates. That's completely obviously not true and will not occur next, 20, 30, 40 years. That means any of the turbines that are running in base load to be economic in that type of renewables environment, they need to be able to run as peaking load turbines. So the demand for our technologies and our engineering skills to be able to convert those turbines over is very, very high. Hence, the level of growth, in that marketplace, our pipeline very strong, as I said, out to 2030. So we expect a continued, very good outlook for Baltec, which is great. Second business unit, EGL Energy. Clearly, in my view, for a business that's 130 years old and the oldest boiler company in Australia, to be able to grow the top-line by 34% on the prior comparative period is an extend -- outstanding result again. Now, you'd be aware of those, the drivers, hopefully behind that, obviously, our increased installed capacity means we keep growing our base of recurring revenue by servicing what we've installed by putting in service level agreements for 5 years when we sell new boilers. And we've had a good period selling new boilers as expected, and I hope the market was clear on this. Margin declined 2.1% on the prior and that was the cost of associating -- associated with on-boarding the new 10 staff that we talked about. So we hired 10 additional service staff during the period to support top-line growth. We identified back in, I think it was about, May that there was additional demand about what our current service levels were. So we made the conscious decision to invest into that. It takes probably 3 months for the training of new staff member within that boiler service division to become a qualified boiler service technician. So if you do pretty simply, 10 people at $150,000 a head for a quarter, that's about $400,000 that's gone into that investment. So if we hadn't chosen to grow that way, the result would clearly be higher with a lower top-line growth. But we've made a decision to continue to penetrate that market to grow our service and recurring revenue, which in total, across the whole of EGL now to 52%. That strategy has been very, very successful. Secondly to that, we secured a deal back with Fulton Boilers to be their exclusive distribution company in Australia back in May and we commenced our sales initiative. Very pleased to report that, that's exceeded our expectations and growing faster than what we expected it to. At the time we secured, I spoke about achieving $2-plus million in sales in the first year, holding -- hope to build it up to $6 million, $7 million over the coming 2 or 3 years. We're probably annualizing closer to a $4 million mark in the Fulton Boilers right now. So that strategic initiative didn't cost us any capital. We did the deal with Fulton's to do it in Australia. It's worked very well for them because they've increased their sales significantly and it's worked very, very well for us. So those 2 strategic initiatives we employed to grow have come through fantastically for us. Obviously, the bottom-line will now catch up to that. The top-line in terms of its growth, but we've certainly increased our market share throughout that segment. The fact that we're the only single 24/7 service provider nationwide means for those Tier 1 clients, we're a very, very attractive proposition. And a very simple example of how that product ranges work for us, we're currently talk to 1 fast-moving consumer goods company about an 8-megawatt boiler as well as 4 small electric boilers. And the reason those FMCGs are interested in those smaller electric boilers is they can tick the green box that they reduce the carbon footprint and move to type of boiler that's not burning hydrocarbon. So that strategy has been terrifically successful for us. So we'll continue to grow that business. And as I said, you'll see the margin catch up over time in that business. EGL Clean Air, as I flagged back in last year's results and at the AGM, always going to be very, very challenging market conditions. Margins declined in the half with several projects going on hold or being postponed. You guys in the market, you'd be aware of what's going on. I think we're doing work on Pilbara Minerals pilot plant I'll have example I think that's gone on hold as with many others. So if you look in that prior comparable period into 1H '24, we had about $7 million in revenue in the lithium sector in that period, maybe $6.5 million in lithium, which is now completely declined, of course. We strategically purchased Airtight Solutions back in May of '23, looking at the EGL Clean Air business unit and saying, well, it's highly leveraged into the mining sector and that brings certainly cyclical risk. So we purchased the company to move into air pollution in dust in particular matter, unrelated to the mining sector, but much more around the commercial and industrial sector, which has diversified our revenue base and helped to mitigate that single sector risk, which we were facing. Albeit you have to go through the pain of that cyclical downturn. It's really good to note now that trading conditions with that dust in particular matter sector appear to be a lot stronger. Since we bought it, there's obviously the big downturn in the building sector and the joinery sector, which was hurting its results. We're now seeing that start to turn around, which is great. A very good example of generally in that business, work on hands around $2 million. Over the course of the last couple of months, work on hands increased by 50% up to $3 million. So we're really starting to see the strength of that coming through. The other one is, new products we've also introduced. So we introduced a dust suppression technology to go on to waste sites, largely working above shredders. We're using the technology associated with compressed air to stop the dust getting out into the broader environment within that waste recycling plant inside the building. That technology, it's a U.S. technology that again, we've got in Australia has gone particularly well. It's now been trialed, I believe, at around 3 sites. One of those customers has already purchased the unit. They've indicated they've got interest in purchasing another 4 or 5 and it's been trialed at another 2 sites that are strongly interested. So us introducing those new technologies, similar to what we did with Fulton appears to be going to pay dividends very much within that business. So I'm expecting we've seen the bottom now in air and yes, we've faced the pain of that lithium cycle and we'll start to see some improvement, I would hope. EGL Waste. Very, very pleased with what's going on. So we've had exceptional success from our large tender pipeline in the period. We haven't announced these. We're waiting for the investor briefing this morning, but we've won a construction and demolition plant up in Queensland, which is terrific. We received notification of being preferred supplier for materials recovery plant in New Zealand. We're moving forward to a period now of negotiation and finalizing that contract. So we see that move forward quite soon. There's a number of others that are out there as well. There's probably another roughly 3 tenders that are due for notification of preferred supplier or contract award within the next 8 weeks. Some of those are quite imminent now. We're aware of the fact that we had last to in a couple of those. So I think after a couple of years of fairly hard work into this sector and hard work in developing that tender pipeline, it looks like it's going to have a very good payback for us in this second half of the financial year, we're aware that it's commission that we get initially on the sale. So we get the immediate profitability from those sales coming through. As I said, looking very, very promising. We've already landed 1. We're about to land 2 and potentially another couple coming straight through. So we expect to see very good results from Waste Services in the second half. And we still got a pipeline after we've taken those couple of wins out of $108 million. So still a very strong pipeline coming through. The other thing I'd note, we talked about landing the Kadant PAAL distribution agreement in Australia. I think that was about February or March of this year. We're now getting involved heavily in that market. So we're now doing servicing of Kadant PAAL balers. We're doing the spares for them. And we've got a couple of balers that we priced for tender and sales at this point in time. They're a high-value item. They're EUR 600,000, EUR 700,000, so over AUD 1 million that we make very good margins on. The revenue at $600,000, obviously not big yet, but within that's just pure service revenue. So we're now doing $100,000, $120,000 a month in servicing our customers, building up that recurring revenue base as we continue to grow. But I can't emphasize enough that our Waste clients contribute material revenue across the whole of the EGL business. We don't book it into Waste. If we sell a dust suppression system, it goes in EGL Clean Air. If we're selling autoclaves to deal with medical waste, it's going to EGL Energy, but very promising half and a very promising outlook, which is terrific. EGL Water, much of the same. And ironically, it's taken roughly the same time to get to business into these positions. So significant milestone just before Christmas of getting the draft approval from the EPA. We're still waiting final approval to come through. I'm sure that's shortly, but the EPA unfortunately take -- seem to take a long time doing everything. That's got no impact on where we are currently with the business. We also got the patent out of the U.S., which ironically came quicker than we expected, which is another significant milestone for us. I guess what's more important is where we are on the commercialization of the PFAS separation technology that we've been working on. We've continued to progress it very well, Board approval for a detailed business and marketing plan and committing the resources required to develop this technology. By that, I mean that we'll be putting on a direct salesforce to continue to penetrate that market. We've identified over the last 6 months and the work we've been doing that and we've got interest from the liquid waste treatment facilities, we've got interest from landfill owners and we've got significant interest from water authorities. And when I'm talking about water authorities, there's something in the order of 5 waste streams, different waste streams within a water authority that all need treatment for PFAS. And we've executed as recently yesterday further NDAs with water authorities to be able to treat all 5 of those waste streams and let them know the results of how they've gone. The level of interest in the product is high at the moment. We'd have 4 or 5 pricing tenders sitting in front of clients that we're highly engaged with. We're on client sites twice last week, looking at the final design of what they require for their PFAS plants to achieve treatment. We've taken sample loads from them. We run them through our technologies. We provided them the results. And as I said, we're now in that final design phase. So I think you can expect to see a bit more excitement and some good results coming through this segment at the moment. As I said, it's taken a while. It's been very hard work, but we've really got it up and going now. The bottom-line is an important one. So the PFAS remediation trials of soils and biosolids, it's very, very important to us that we continue to move through that. Part of the Board approval is also investing in materials handling plant on top of our core technology to be able to do biosolids. The reason that's so important is a lot of the PFAS its final resting point is at the sewage treatment plants. And that's either because it's being discharged by trade waste into the industrial sewers or it's being picked up through ground waters going into the network and other sources of getting in there. It's pretty basic. It's about, what, 28 million people, they need to use bathroom in Australia, all of that waste, the biosolid waste is accumulating at these facilities. Traditionally, it's been dehydrated and sold as a biosolid as a product to go to farmland as I think it's called a soil enhancement product and it's allowed under part of the EPA Act that says if something could be beneficially reused and it's done. So all of that immense amount of biosolids has been put on the farming land. Unfortunately, now there's so much PFAS that's coming through our sewer networks and ending up with those sewage treatment plants that those biosolids are now contaminated. And you can imagine that the sheer volume of those contaminated biosolids that now cannot be put on the farmland. So that's a new and very large problematic waste stream that needs sorting. We've worked on testing those results. We've got very, very good results coming through on what we've been able to achieve with biosolids. And I think part of what we're signing up with these water treatment companies will be indeed being able to work through biosolids and do some large trials on biosolids. So very, very promising times now in EGL Water. It's been bloody hard work, but I think we're at the point now where we're going to start to move forward with what we've worked so hard on commercially. In terms of outlook, it's most of it I've already spoken about. Baltecs is, of course, had to have very strong performance. So revenue up 85% and a very good sales pipeline supporting going forward. Obviously, that increased support to renewable energy that we need to do peaking load turbines. So when the sun doesn't shine, when the wind is not blowing, you need to turn on those gas-fired generators, you probably seeing the ads to that effect on your television. We're aware of turbines now that have been turned on and off up to 4 to 5 times a day. So our world-leading technology and being able to have silencers that will work in conjunction with those peaking load turbines has put us in a great position. As I mentioned in EGL Air, conditions remain difficult, especially in the lithium sector, but our strategy is to introduce dust extraction and help to grow the business, diversify those revenues and we're really seeing green shoots and improving market within that dust extraction sector. EGL Water, I won't cover again and Waste, but suffice it to say, exciting half expected with tenders have been awarded. Fulton distribution obviously exceeded expectations and the additional staff will continue to grow the revenue within EGL Energy. And for us, I guess, it's really been that extended product offering, whether it's Fulton, whether it's Kadant PAAL balers and other opportunities that we're now looking at the pipeline. We're not spending any capital. We're introducing very high-value licenses to the company and driving that growth. ERP, you're probably aware, we're going to implement over the next 12 months to improve the efficiency and the accuracy within the business. And our guidance remains unchanged. It's expected to increase approximately 10% to 15% on the prior year. So I've had a couple of questions come in that I'll try to respond to. Now you're certainly welcome to put in more questions. So thanks for time today.

Baltec looking beyond the aberration this year, are you comfortable getting back to FY '24 type margins? Yes, we are. And why do I have conviction in that is I know what price we're tendering these jobs at to the -- literally to the percent. I know exactly what our overheads are. So if you're tendering a certain price, you're winning a certain gross margin, you understand your overhead. No issues at all with saying we'll be able to get back to the prior EBITDA. In my mind, this was a one-off event. It was a mistake made, unfortunately, by a member of staff that was made because of very, very unusual circumstances. There's nothing we can do about that. We've just got to leave it and move on and try and ensure it doesn't happen again. Bear in mind that it's always going to be a slightly lumpy business because different jobs that you're working are going to go into new financial periods or might get delayed a little bit. So it won't always be absolutely smooth sailing. But when your question is to my conviction around that, my conviction is very, very high that we'll be able to achieve that. Energy continues to be the standout here, walk us through whether more staff [indiscernible]. Look, the answer is probably yes. Ironically, we could probably go beyond the 10 that we increased at this point in time. We're clearly taking market share of our competitors. Clearly, the Fulton has also damaged some of our competitors. One of our competitors, quite large competitors actually pulled out of servicing within their own home state where they were quite strong. So yes, we'll -- I think we'll continue to grow the amount of people that we have servicing that sector and continue to grow the business that way. It's great margin, great recurring revenue. For those of you who don't know, for every boiler that's over 2 megawatt, that needs to have an inspection performed every 5 weeks. So we've now got, I think, over a thousand on our books that is being serviced 11 or 12 times a year -- inspected and serviced 11, 12 times. You said something like 14,000 services we now undertake. So phenomenal recurring revenue. What year-on-year sales growth can this do margin-wise? I guess it's a bit hard to look forward. And that margin has always been around that 14%, 15%. I've sort of articulated that there was a 2% of the $375,000 we spent in training this half. Opportunities in Waste & Water, I think I've covered fairly well. I haven't heard much from EGL's inlet filtration system solar farm. That is absolutely the fair and reasonable point. The installation is going on, I believe, at the moment, it's been delayed 2 or 3 times. The big cyclone that went through, whatever it was 1 or 2 weeks ago has caused it to be pushed back with the flooding in the area and we always knew a fab installation brought a risk with that. Hopefully, that product will be installed fairly quickly and then we'll be able to use it our flagship going forward. It hasn't been the -- in all honesty, it hasn't been the easiest project to get done to get your first one down out at Chichester in the middle of the Pilbara probably was quite a tricky way for us to go ahead on. But it is underway now and hopefully will be completed fairly soon. Any PFAS tenders to convert in second half? The answer is absolutely yes. We've been working very hard on them. We're in close consultation with our clients. As I mentioned, we're out on their sites just last week, talking about the final design with 2 of those clients. So working, of course, as fast as we can to get that done. So I would guess that, yes, they'll fall in this half, in my view. Guidance implies a bit second half result. I assume that typing is meant to be a big second half result. How much of the result is covered by work known in hand -- work in hand projects versus still having to secure wins. So I guess around 80% would already be known, maybe close to 85% would already be known in work in hand. We're obviously full in our pipeline for Baltec, so that's already done. Our work in hand for Tomlinson's is at extremely high levels. So I know Energy is done. The work in hand, as I mentioned, has gone up by $1 million in Air. So that's pretty well comfortable. So secure wins in Waste & Water, yes, that's absolutely true. But as I mentioned, we've already secured 2 in Waste that we've just announced today in this result that one we've done the contract on the other one we're finalizing. So that's 2 of them done already with another 3 in the pipeline. Of those 3, we know we preferred tender -- sorry, we know the last 2 in 2 of those, and we're expecting to know those within the next 2 to 3 weeks. So once again, it might be literally in our hands now, but very, very confident. On that going forward, we know these customers well. We work with them very closely for 2 years. So we'll -- we've got a pretty good idea on where we are. Repending waste tenders to EGL expect revenue growth from both in commissions and installing. Yes, that's absolutely correct, that question. So we do expect revenue growth. So the immediate sugar hit is the commission. So if we sell a $20 million plant, we get a $400,000 commission, which is 100% profit made straight up, which is great. For us, it goes well beyond that. It goes to the other things that we can sell into that plant. So generally, we'll then do the structural steels for that recycling facility. We'll do the ladders and platforms. We'll do the dust suppression systems, hopefully through the new dry fogging systems that we've got. We'll do the dust extraction systems through EGL Clean Air. If they've got medical waste or pathogenic waste come in, we'll do boilers and autoclaves for them. And then we will service -- and our balers, I should mention, it's not good to me to mention balers. If you're doing a MRF for a plant with an SRF line, then they'd also be looking to buy a Kadant PAAL Balers offers as well. So yes, we'd expect that to grow from the current $120,000 a month run rate. But don't forget, we book a lot of that revenue. So if it's a dust control system, we get booked to air division. If it was boilers and autoclaves, it get booked into the boiler division. But yes, I think we -- if we sell a plant for around $20 million, $25 million, we'd expect to get $3 million, $3.5 million in additional sales out of that plant. And as I said, we're really starting to crank up our service in Australia. Next one, sorry, do you expect D&A as a percentage of sales next year, still low single digits. No, there's no material CapEx planned. So we're not a CapEx-heavy business. The CapEx in Baltec is absolutely minimal. CapEx in Waste & Water, very minimal outside of building plants before they're sold. So it's only working capital. Tomlinson does use a little bit of capital, but not particularly much. So if we go through the example of the 10 people we put on, it means that we leased 10 more units and we would have given each one of them $10,000 worth of tools. So that's roughly the CapEx. The only CapEx planned is simply the ERP that we process we're going through at the moment. That's in the order of $500,000 to $600,000. That will be a blend of FY '25 and FY '26 that will go through the market. So no, I wouldn't expect D&A to go up as a percentage of sales. Bearing in mind, of course, now that leases do get booked in part to depreciation and amortization for the amortization on these is about 80% of our lease costs and about 20% goes through the interest line or something like that. What testing requirements do clients have to confirm PFAS waste stream treated to spec? That's a good question, pretty easy one. So generally, there's twofold. Before a client will move forward on ordering a plant, they'll give us samples of their PFAS waste streams. We'll take them to the facility. We'll process those streams and make sure that we can achieve the outcomes that are required on those waste streams, which is obviously then when they get interested and talk commercially on a plant and we've been able to achieve that, I think with most waste streams that we've looked at. How do they treated to spec? Before you're allowed to discharge to sewer liquid waste treatment plant facility, you've got to test what's contained within those liquids, of course, because it's not just PFAS, it will be hydrocarbons, it will be the pH levels, total dissolved solids. So you take samples prior to discharge, which would include, of course, PFAS before it's discharged. So it's absolutely checked before that happens. So next one, I appreciate all the hard work, it's been a trying year. Thank you. Reaction today says the market is struggling regarding forecast credibility. Well, I think that would be quite a remarkable take on things. We've upgraded every year for 3 years in a row our guidance and we've had one single issue on a one-off. So people want to take that view of that forecast credibility. That's their decision, not mine, but it would be an incredibly short-term view in my view. I'm not saying the guidance is conservative -- sorry, let me read it, conservative sales growth can continue. So sales growth certainly in FY '26 can continue. Clearly, we'll get the full year benefit of the additional staff with Energy. We intend to grow Fulton sales even further. Again, I indicated originally, I thought that would be worth $6 million to $7 million to us. So it's still almost another 50% growth in there. I certainly believe or hope that we're at the bottom of Clean Air in that cycle. I don't think lithium is coming back in a hurry, but there's no more lithium to take away from us. So yes, we'll continue to achieve growth in FY '26, and we work extremely hard to grow the top-line in this current market. It's 16% when you've had negative 6% taken out through lithium. It's actually quite a remarkable achievement for the company and an absolute credit to the company and what it's been achieved. We own our mistake and that's life and we can't change that. But how many other businesses are growing their top-line at that level at our size in these type of industries, I'm not sure you find that many. Cash conversion lag in 1H given inventory build on contract assets. Yes, you're absolutely right on that. Inventory because of the Fulton, et cetera, I think we've increased stock by about $3.5 million during the period. Andrew is more than welcome to chip in and answer that. And yes, contract assets have gone up significantly. So that's works that are already underway that we have an invoice. So that will swing very significantly.

Yes. Inventory increased due basically to, like Jason said, Fulton's plus increasing the stock availability in Airtight. Also contract assets will generate increased cash flow in the second half. Jason?

Thank you, Andrew. Okay. So next one, PFAS, is the current municipal water effort focused on water, wastewater sludge, [ pre-SMIC ] technology and economically suited for treating contaminated catchment. So the contaminated catchment water is not actually a real issue in Australia, to be honest. It makes the media, you've heard about a dam in New South Wales. It's effectively not a market in Australia. In my view, we largely drink rainwater in Australia that's collected in dams. Generally, our dams are very, very clean. I'm only aware of 3 that have got minor levels of PFAS contamination in them. Your reference is very different in the U.S. market. In the U.S. market, depending on where you are, 40% to 60% of drinking water comes from groundwater. That's why they have such concerns about the drinking water in the U.S. So completely different market for over here. So the big issue is over here. So wastewater -- contaminated wastewater, that's a big issue. Biosludge is a very big issue. Leachate that's coming out of landfills is a massive issue where the products are broken down in the landfill. It's rain and then it's being collected in that rainfall. Catchment, given there's over 1,100 landfills in Australia, that's an enormous area that requires improvement, requires treatment. We're very successful in treating leachate. We'd almost call that our sort of #1 preferred product, if you like, as much as landfill leachate is bloody awful. We get exceptionally good results on that. So it is -- and the market's growing all the time. We've -- at the moment, as I said, we're talking to one waste authority about doing effluent, an airport, biosludges, groundwater and something else, which Paul Gaskett might be able to come in and help me out with -- beg your pardon, Paul?

Yes. Soils.

Soils as well, sorry. So yes, it's a very, very wide market in Australia, but drinking water is certainly not a big issue in Australia in my view. So operator, I don't seem to have any further questions at this point in time.

Thank you. If there are no further questions at this time, this does conclude our webcast for today. Thank you for participating. You may now disconnect.

Cheers. Thank you, everyone, for listening. Appreciate it.