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

Thank you for standing by, and welcome to the Environmental Group Limited FY '26 Financial Results Presentation. [Operator Instructions] I would now like to hand the conference over to Jason Dixon, CEO. Please go ahead.

Good morning, everyone, and welcome to the financial year '26 results presentation for the Environmental Group. I'm joined today by Gareth Nicholls, the CFO; and Paul Gaskett, the Chief Commercial Officer. Gareth will talk to some numbers and if you have any questions, Paul will be able to certainly address your issues with PFAS as we move through the presentation. I welcome questions at the end. So a tough year, as you all know, with some unexpected events that took place around the world that impacted our business we could control and then others within that we should have had more control over. But at the end of the day, I'm pleased to say that we met the revised guidance that we put out to the market earlier this half. Revenue, I guess, flat year-on-year is really a reflection of the Baltic customers and some of the delays we had with the events in the Middle East. ERP now, thankfully, is operating functionally. We still have room for improvement and efficiencies to put through, but it's operating as it should, and the system is far more efficient, accurate and performing as it should have done. Significantly, and I guess something we haven't spoken broadly about is the strength that we brought to the management team this year. The business has grown substantially from turning over sort of $40 million to $110 million. We've introduced a new CEO of EGL Baltic during this period. We've obviously brought on Gareth Nicholls as new CFO who's worked very hard on trying to get the systems in place and make sure we got the correct process and procedures. And Kiril, who is Head of Engineering, has also taken over as General Manager of TAPC. So very significant management changes within the business and a real strengthening of that management team during this period. So in just summary, as I said, revenue was flat basically on PCP at $112 million. EBITDA came within our guidance at $8.7 million. Pleasingly, again, 419,000 hours worked up on about 380,000 last year. We had one very minor LTI, which is the laceration to a finger in that 419,000 hours. We can always do better, but a good result. PFAS, that Paul will talk to later on, we're getting a lot more traction now. We're really looking forward to the expansion of that business. And we treated over 5 million liters of PFAS-contaminated water during that period and at the same time, maintained all of our global certifications to deal with clients such as Siemens and our larger overseas clients that require those 4. So importantly, Gareth is going to take now through an earnings bridge just to talk about the results and how it was structured for FY '26. And I guess this provides some comfort as to what's happened and where we're now up to within the business. So I'll hand over to Gareth to talk to you about the numbers.

Thanks, Jason. As Jason just mentioned, FY '26 was a disappointing year from an EBITDA perspective. We entered the year expecting to build on the strong growth achieved over recent years. However, as outlined in our trading update, performance was impacted by a combination of factors, including disruption associated with the Middle East conflict and challenges following the implementation of our new ERP system. Thankfully, most of those ERP-related issues are now resolved. We recognized $10.8 million of significant items, including a $5.7 million impairment of the Airtight business. Structural changes in the airtight market reduced the carrying value of the business, while delays in legal proceedings resulted in a charge having to be taken in relation to an onerous contract inherited as part of the acquisition of that business. Legal proceedings relating to the onerous contract are ongoing with a substantial recovery being pursued. To that extent, contingent asset has been disclosed in the annual report in relation to the potential recovery, but no asset has been recognized as at 30 June. Can you go to the next slide, please, Jason?

Yes. Oops, sorry. Are you good?

So despite revenue being broadly flat year-on-year, we continued to strengthen the quality of our revenue base with recurring revenue increasing to $61.9 million. Over the past 5 years, the group has delivered substantial growth supported by both organic initiatives and strategic acquisitions. This recurring revenue foundation provides great resilience in future earnings. Next slide, please. More than 55% of FY '26 revenue was recurring or contracted in nature, providing a strong foundation for the group. EGL Energy continues to be the largest contributor to this recurring revenue base. We remain focused on increasing recurring revenue across the group, which will further enhance earnings stability. I'll now pass back to Jason.

Thanks, Gareth. I'll take you through the operating divisions now and how the performance was for FY '26 and how we're seeing the early days of FY '27. So I'll start off with EGL Energy, which is obviously our boiler business, where we're using steam mainly for the function of sterilization. It's an essential service used throughout any food productions, hospitals, anywhere you need sterilization processes. Acquisition has gone very well as ABC Advanced Boilers Combustion from over a year ago now, probably 1.5 years ago now. They've integrated into the business really well, which has been terrific to see. So revenue, good growth again, up to $64.5 million, up 20%. Gross profit increased $3.4 million, up 21%. You'll note, as we've spoken about a few months ago now that EBITDA was down marginally to $7 million, mainly due to the impact of the ERP system issues that we had with invoicing at the time and also the fuel price. We've got about 133 vehicles in our fleet. Ballpark, they're doing $150,000 a day. We're doing 22,000, 23,000 kilometers a day in our fleet. So certainly, the massive increase in the diesel price had a significant influence before we're able to put through changes in our travel costs within that business. Service revenue grew from about $41 million up to $47 million, now 73% of the entire revenue within that business. So the business remained very strong in its underlying performance. It met its budget expectations on revenue, and it was just purely that issue we have with the invoicing and the performance during that second half that impacted the EBITDA. But I'm pleased to say that the business is trading normally again now and in line with expectations post the rectification of some of the issues with the ERP system. New boiler sales have been particularly strong in early financial year '27, which has been great to see. The Fulton product sales and service expansion continues to be strong for Tomlinson's. That range that we brought in the smaller scale boilers sort of 2 megawatt and lower, has gone very well. As I mentioned, I couldn't be more pleased with the acquisition of Advanced Boilers and Combustion. They've increased the scale of our business and broadened the product and service capabilities. So they're doing a lot of additional work for us now. They are manufacturing our PFAS separation plants, control panels across the business, tanks and vessels and other structurals. Great culture within that business where they've been very good at being able to assist the other parts of the business to make sure that we're getting all of the margin maintained in-house. So very pleased with how that acquisition has gone. Just move on to Waste now. And I'm sure at the end, Paul can answer any further questions you have on PFAS. But it's truly been, for me, an exciting period and especially exciting last, I guess, 6 to 8 months within that PFAS treatment business as we've learned more about the technology, its application around the marketplace. So from a pure financial view, bringing up to $5 million. So we've grown that business from nothing a few years ago to $5 million now. I wouldn't worry about the gross margin too much. It's purely depending on the timing of when we get commissions on Turmec sales. But the focus really now is developing that PFAS side of the business. So parented technology protected across Australia, U.S. and Europe. R&D investment has broadened the range of waste streams that we can treat. So most of you will be aware that we built a simulation plant close to a year ago now where we could put in waste streams from the marketplace and test them to see what would happen out of our commercial scale plants. That is absolutely accurate in simulation plant. And we've been able to prove that we've done a much broader base of PFAS treatment across water, soil and biosolids. So that's been a big move forward for the group. Previously, as you'd be aware, we really focused on water and -- water from industrial waste streams and landfill leachates. To be able to broaden that out has given us a much, much bigger addressable market and very applicable in other parts of the globe as well. So by way of example, PFAS-contaminated biosolids in the U.S. is quite a big deal now, and it's opening up those very, very large markets for us to enter. So the capability has really given us the potential to improve the beneficial reuse outcomes. So avoiding landfill or specialist disposal and reducing those disposal costs for our clients. One of the key learnings we had from a recent trip to the U.S. is mobile treatment plant capability is very important for rapid deployment within that marketplace. And you've got those very large waste companies going from site to site and treating, for example, a landfill leachate on those ponds over what can potentially be tens of, if not hundreds of sites in those very large companies. So that was a further development we pushed ahead with. As I mentioned, the increase in those waste streams materially increased our addressable market and the global presence of the PFAS contamination looking for PFAS solutions, and we're very pleased to expand what we can now treat the manner in which we can do it. So it was a period of really, really great development for our PFAS technology and broadening those commercial applications. And as I mentioned to you earlier, we've just had Paul and others in the U.S. talking about global market development strategies and meeting with some very large U.S. companies and other international companies. So pleased with how we're now developing that segment, and I'd like to think that, that will grow in the importance of part of our business going forward. I'll just move now on to EGL Baltic. Reasonably tough period for Baltic in the second half. The impacts came through from the Middle East. The business, as you know, it's a global business where we're agnostic to where we operate around the world. In this particular half, last half, we actually had 3 jobs within that region that got impacted in one way or another by what transpired in the Middle East. So revenue, as we mentioned a few months ago, was down about $7 million, $8 million below expectations. A couple of jobs that suffered delays in the Middle East have now been sorted out. So we had a job going to Iraq. The client had enormous problems getting there, as you can well imagine. And there was another client's project going to that part of the world that we also couldn't get to the client site. They've both been sorted out now. The project in Iraq is now on site. The other one is in transport into I think it's in Pakistan. So that's all been completed. I'm pleased to say that we did manage to increase the margin during that period despite what happened with the delays within those projects. We also had another project delayed in its completion because we could not get parts out of Europe into our manufacturing facilities because of what happened in the Strait of Hormuz and also happened with the closure of the Suez Canal to commercial traffic that's now resolved as well. What is really important is we've had Rob Chignell join as the General Manager of Baltic. He's got a lot of industry experience within the power industry, coming from a very, very large company background and is already implementing changes to processes and systems within the business that I think we'll see not only a better quality product for our clients but improvement on project delivery coming through. So the macro view is the demand for gas turbines in the U.S. remains unprecedented. It's driven by data centers seeking to secure their own power supply generation. So as you can imagine, previously, power was just coming off the grid. They now want power behind the gate with their own turbines. So that's seen a significant change in the marketplace. So we're seeing record-high turbine orders but being redirected into the U.S. from other global markets with changes in that market. So I guess in response to that, we've started -- we signed an agency agreement within the U.S. in a key hub in the Midwest for engineering procurement to make sure that we're involved heavily in that market and understanding what's going on in the marketplace. Currently, we're now quoting a number of jobs in the U.S. on RFQs in that data center marketplace. I think we might have 3 or 4 we're currently in tender for. So that strategy has worked quite well. Obviously, the expansion of renewable energy keeps increasing the need for gas turbines, and they operate flexibly, of course, with other renewables now. So we operate in both peaking and baseload applications. Our proprietary silencer technology remains a key differentiator that we can do that noise attenuation of peaking-load turbines and get a very, very durable product throughout that type of operating functionality. So we look forward to hopefully end of the conflicts in the Middle East and that market returning to normal for us. And just on EGL Clean Air, so in line with the expectations that we had. So revenue roughly flat year-on-year. Gross margin remained strong at 36%, which, I guess, demonstrates the technologies that we have and how they're well placed in the market. Much better results in the second half with EBITDA increasing by 84% compared with the first half. We secured a major contract with Pensana that was around $9 million for the scrubbing of gases from a rare earth offtake system that's being built in Angola. And as I mentioned earlier, Kiril Niktin appointed General Manager of TAPC after a long time with the group as Head of Engineering and has brought a very, very strong discipline into that business, which has been terrific to see. So Clean Air has still got a very good reputation in the air pollution control market, process optimization and compliance solutions. As Gareth mentioned, we did take an impairment charge against Airtight just writing down the goodwill as part of that acquisition. As Gareth mentioned, it is subject to legal proceedings. I won't say too much, but there's continued asset gone on to our -- gone into the notes of the accounts. We're very confident that, that will be a successful litigation process for us. And hopefully, it will be a good return of funds to the business once that's completed. I guess the really important part is we completed a major dust control system within the grain sector. It was the project inherited from the Airtight acquisition, and it was largely delayed as we had to review the complexities and make sure that we could deliver what the client ask for. It ended up being an absolutely fantastic project, great phrase from the client about how we brought together and made it work. The professionalism and capability we showed through that. So I'd expect this will lead to a significant amount of work going forward now in the grain sector. So what was difficult to deal with in the acquisition, I suspect, will be a long-term benefit to our shareholders from here. So I'll just talk to the outlook quickly now. So we expect EBITDA to increase from the prior comparable period. You'll, of course, hopefully see growth with improved margins and improved margins back within that the energy business now it's obviously trading in a more normal fashion. We'll continue to grow that One EGL culture to sell multiple services to service lines across the customer group. It's quite common now that we're doing the boilers, the pollution control systems and the combustion systems to large industrial clients. So that strategy of really bringing all of our business units to one client has continued to be a very good driver of our revenue growth. As Gareth mentioned, 55% of our revenue is now recurring at 73%, 74% within that energy business. So that's made us a much stronger and more reliable earnings stream over time. We'll continue to focus on that. EGL Energy has had a strong start to the year with boiler sales, and as I mentioned, should see improved EBITDA margins. EGL Waste Services, I mentioned, certainly, the PFAS treatment plant sales are gaining traction. We've got a couple in recent months and hopefully hoping up that international markets will drive strong sales growth from here. Baltic, as I mentioned, the macro outlook is very strong, a little bit of uncertainty around timing with certain events around the world. And we should see growth again in Clean Air with that major rare earths contract win that we've had. So looking forward to a better financial year '27. Obviously, financial year '26 was pretty rough. And I guess as a management team, we didn't feel like we could take a trick, but we work extremely hard to strengthen up that management team and to make sure that the business continues to perform as best as we can into the future. So moderator, I'm happy to hand over to you and respond to some questions.

[Operator Instructions] The first webcast question is, please go into more detail about your PFAS global market development strategy. What is the most efficient way to monetize this technology? And when do you expect it to make a material impact on the profitability of EGL?

So it's been a really interesting journey over the last 12 months and especially having that simulation plant, which clearly gave us an indication of just how robust the technology is, how flexible it could be over various waste streams and the modularity of it to be able to go up or down in volumes and different waste streams that we're treating, really just using the same brains, but different material handlings for those different type of waste stream technologies. So in terms of that global market development strategy, as I mentioned, Paul was in Europe, probably corrected that in April, May talking about technology, he was in the U.S. in the later part of July, early part of August. So we're developing those strategies right now and that we have meetings on it next week since the results are done. The most efficient way to monetize the technology, but I think that's underway now. We've just sold a couple of plants. We've already got a couple of plants in and running. The ability now to deal with those more diverse waste streams has opened up a bigger addressable market. So I'd expect you'll start to see growth within that business and increased sales globally in the near term.

The next question is, are there any data center pipeline agreement visibility for next year? Any guidance in terms of EBITDA, FCF?

So it's a fairly difficult question to answer. So in terms of the data center pipeline, obviously, we see RFQs up to 2, 3 years in advance because building turbines is not an overnight process. At the moment, and I'm just going off the top of my head, at the moment, we are -- we have 3 or 4 data centers in the U.S., one in New Zealand from memory and another one in Australia. So there's probably about 5 or 6 that we're looking at turbines behind the gate right now for. Obviously, there's been a rapid move in that market for all these turbines being sucked into the U.S. as AI has really come along and meant that they need an enormous amount of more power within those businesses to be able to run the AI. And my understanding is it requires about 7x more energy to run an AI search than a standard Google search. So that's driven the demand. So it's been a very rapidly moving market, but one that obviously we're now engaging in that agency agreement in the Midwest of the U.S. at the heart of the data centers, we expect will get us heavily involved within that business. I'm not sure EBITDA, I presume you're talking about free cash flow. We don't provide guidance on individual businesses, of course. But this has got very good margins. It's got very good intellectual property and what's an interesting macro outlook for us, I'd expect you'll continue to see that business perform reasonably well into the future, subject to obviously the Middle East being a little bit problematic for us at this point in time.

The next question is, please go into more detail about your PFAS global market development strategy. What is the most efficient way to monetize this technology? And when do you expect...

We already answered that question.

I apologize.

Do you have another question?

Yes. Can management confirm it's satisfied with the group's liquidity position and confirm there is no intention to announce an equity capital raise at today's depressed share market price?

Well, liquidity position, obviously, no doubt it has got tougher with the bugger up in ERP, and the invoices, et cetera. At the same time, we're not sitting here today saying we're going to raise capital at the current share price. Clearly, we're not going to be doing any acquisitions either. We've got a big focus on our working capital at this point in time and making sure that we get the invoicing right and we get the cash flow right. My recollection is invoicing out of energy and Gareth can probably talk to this better than me, has been around record highs in recent months and collection is quite strong. So we've certainly had a very large focus on that part of the business. So this one talking about Energy, it is the same sort of question. ABC acquired revenue $16 million. Does this imply that absent ABC's acquired revenue, EGL's revenue would have declined? No. Because ABC was in the prior period for part. My recollection is there was probably around about half of that revenue recognized in the prior year from memory. So no, I don't think -- I'd have to do the numbers or get Gareth to do the numbers, but no, there's certainly a large part of it recorded in the prior period. The next question, size of the PFAS plant sold more recently. So one was a bit bigger than the standard plant. I think it's around 50,000 liters per hour off the top of my head. The other plant is a totally different configuration, which is working in a soil washing type of facility. That's an extremely large plant capable of doing many hundreds of thousands of liters per hour. So both bigger than our standard sort of 20,000-liter per hour plant. Next question is free cash flow and earnings per share is something that you consider? I haven't seen it or mentioned in the presentation. Well, I think if you go to the Appendix B, there's a reconciliation of cash there. We certainly do consider earnings per share and free cash flow. We'll take it on board about future presentation, but it's something clearly we focus on, and this is an unusual year for us, so just take away any issues. We implemented the ERP that cost us several million dollars. We moved sites and consolidated post the acquisition of ABC. So there was a lot of things going on out of our free cash flow that we were doing to develop the business into the future and obviously make sure the business is sustainable, but it's something we clearly look at. So Gareth, do you want to talk to the next question about free cash flow positive or cash flow positive for FY '27? We're certainly cash flow positive in '26 from operations point of view. We just reinvested into the company as you expect we would, but I'll hand over to you, Gareth.

Yes. That's correct. That's -- probably the short answer is that yes, we were cash flow positive from an operating activities perspective at $2.3 million positive. So that is actually a better result than FY '25. But obviously, when you take into account some of the considerable spend that occurred, so we spent around $2.4 million on the ERP and around just under $1 million on the relocation. So those 2, which position the company well for future growth, but were cash flow negative during the year. So they did have an impact. And coming back to Jason's earlier point, we've seen quite strong cash collections over the last 2 months from our energy business, which is not unusual at this time of year, but it's pleasing to see that July has been so strong.

So the next question, let me scroll down. Sales growth for FY '27 for energy given energy's trade is expected is FY '25, EBITDA margin 14%. Reasonable expectation. So I'd have to do the blended margins between Advanced Boilers and TES as comparison to '25 where you only had part of Advanced Boilers in there. But in broad answer to your question, we'd expect sales growth again in FY '27. For each boiler we put into the market, we're then doing service level agreements for the next 5 years. Boiler sales have been very strong, as I mentioned earlier, already this financial year. So that should lead to underlying growth. And I'd certainly expect margin improvement. I just can't reconcile off the top of my head the blended margins of the 2 businesses, but I'm happy to take that on notice and come back to you. Next one, more recent plant sales also have recurring income component. So I presume that's referring to PFAS. So yes, the answer is yes. So we have a maintenance charge that's per liter or kilo depending on the product that we're processing. Each one of those plants we sell come with a recurring income stream once they're commissioned up and running online. So that certainly is true in the case. PFAS plants sold, how many do you forecast to sell this year? I'd love to forecast 100. So PFAS plants sold, so we've got a few in operation now. We got another 2 into fabrication. So I think by March this year, we'd have 4 in full operation and commissioned off the top of my head. We certainly forecast or hopefully sell another couple of plants on top of that during this period as well. So it's a difficult one to forecast, not because we don't have very, very high confidence in our technology and how we can see economic solutions for our clients. We also have regulators involved in this part of the market, and that obviously can be an issue around timing. But I think we're starting to get accepted now by regulators the technology is extremely effective. And Paul, if you got any comments around that. You...

Yes. No, I absolutely agree, Jason. I think the water authorities are certainly really taking that on board now to eliminate the pollution of the sewage treatment plant. So they're certainly looking at it upstream now to be able to mitigate their risk that they've got within the sewage treatment plant. So they seem to be the key drivers at this point in time. That's across Australia and also the recent trip to the U.S., it's the same over there as well.