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Edited Transcript of ASL.AX earnings conference call or presentation 25-Feb-20 9:00pm GMT

Half Year 2020 Perenti Global Ltd Earnings Call

Canning Vale Mar 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Perenti Global Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Alexander John Norwell

Perenti Global Limited - Group MD, CEO & Director

* Peter John Bryant

Perenti Global Limited - Group CFO

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Presentation

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Mark Alexander John Norwell, Perenti Global Limited - Group MD, CEO & Director [1]

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Thank you. And good morning, everyone. My name is Mark Norwell, and I'm the Managing Director and Chief Executive Officer of Perenti. Today, I'll provide you with an overview of the group's performance for the first half of financial year 2020. I'll then hand over to Peter Bryant, the group's Chief Financial Officer, who will take you through the financial results in more detail. I'll then provide an update on our business strategy and outlook.

Onto Slide 2. When I delivered my first set of results 12 months ago, I outlined our purpose, principles and aspiration along with our strategy out to 2025. 1 year on, we are continuing to deliver against our 2025 strategy. And as I mentioned, I will expand on our strategy towards the end of the presentation. However, I will spend a moment on our purpose, principles and aspiration.

Our purpose is clear; to create enduring value and certainty for our people, our customers, the communities in which we operate and our shareholders. To achieve this purpose, it is about living our principles. Over the last 12 months, we have focused on embedding these principles to shape our culture. And whilst this is an ongoing journey, we've already seen the benefit of these principles to our business. Our principles and resilience have guide us through the tragic events in Burkina Faso, delivered technology first and secured work in new regions. In time, by delivering on our purpose and living our principles, we will achieve our aspiration: to become the indispensable mining services company. In addition, we have set a tagline of Expect More. Whether you are an employee, a customer or an investor, you should always expect more from Perenti as we are focused on improving continuously.

Moving on to Slide 3, our businesses and where we operate. We are now truly a global organization with over 25 years of international experience. Our 8,000 people work across 55 projects in 13 countries, and coupled with our international experience, we are well positioned to deliver our regional expansion initiative. I'd like to specifically call out Canada as a new region since our last results presentation. For the last 6 months, we have had a small team from our underground business working in Canada for a Tier 1 mining company, providing operational consulting services. This is a very low-risk approach to securing on-the-ground experience and knowledge that we are using to refine our entry strategy into North America to deliver underground services through our internationally respected brand, Barminco.

At the bottom of this slide are our 3 industry sector groups or ISGs for short and the brands associated with each ISG. For clarity, our ISGs are underground, surface and investments, and this aligns with our segment reporting.

Turning to Slide 4. You can see some of the key financial metrics for the half year ended 31 December 2019. At a headline level, we've reported strong financial results with both revenue and EBIT up over last year, although NPAT reduced by 7% compared to the 2019 half, largely due to tax expense returning to normal levels in the half, which Peter will cover in further detail shortly. Whilst this result is in line with our amended guidance we provided to the market in December, it is down on our original FY '20 guidance as a result of the performance of African Mining Services, our services business in Africa. I'll add further detail to this when I step through the detail of each ISG later in the presentation.

Pleasingly, our underground ISG and investments ISG both performed exceptionally well, demonstrating the benefit of running a portfolio business. ROACE at 16.1%, although marginally reduced, is very healthy when considering that new projects deliver a lower margin ramp-up phase and the EBIT reduction experienced in AMS during the half. In regard to the capital expenditure being front-loaded, this particularly relates to the Zone 5 project in Botswana, where we don't expect to get the full EBIT run rate until FY '22. The capital investment was significant during the half. I can't stress enough how important ROACE is as a measure for us, and we're pleased with the level we're achieving on an average basis across the portfolio. Although living our Expect More mantra, we are focused on driving this higher. Delivering continued returns on our invested capital, we will ensure we further strengthen the balance sheet and continue to deliver strong returns for shareholders.

The board has declared a fully franked interim dividend of $0.035 per share. We are maintaining our full year guidance as updated in December for underlying NPAT(A) of $115 million to $120 million. We are confident of achieving this number based on our first half performance, and this target is not dependent on winning any new work for the half.

During the half, we secured $750 million in contract extensions and new work, and we currently have $5.7 billion of secured work in hand, which is equivalent to almost 3 years of revenue based on our current revenue run rate. All in all, a solid set of numbers.

Moving to Slide 5, our people. Last year, 19 of our employees tragically lost their lives in a terrorist attack near Semafo's Boungou mine and Burkina Faso. This attack was unprecedented. It was the first attack in Burkina Faso that targeted mining employees and was conducted with capability above what had been seen previously in this proximity to the mine. We are devastated that so many of our people fell victim to a senseless act of violence. As an organization, we continue to do everything we can to support the families of our employees that lost their lives or injured in the attack.

Following the incident, we decided to exit the Boungou and Bissa contracts, and we continue to work with our customers, third-party global advisers and local representatives to actively monitor our other operations in the region. It should be noted that these other operations are in regions that are classified as lower-threat areas compared to Boungou and Bissa. As a result of the conclusion of these contracts and the termination of GMC's Nsuta contract in Ghana, our overall employee numbers are just shy of 8,000.

As part of our drive to become the indispensable mining services company and aligned with our 2025 strategy, one initiative is inclusion and diversity at all levels. It is pleasing to report on the progress we are making on this front. We now have 2 highly capable female directors, Alex Atkins and Andrea Hall. Additionally, we have appointed Vivienne Powe as Chief Development Officer, a role that forms part of the group executive. Vivienne brings more than 20 years of experience to Perenti and has held senior executive positions with BHP, Iluka, Woodside and other mining organizations. In addition, we are proactively encouraging more women into the industry through targeted recruitment campaigns. We also have partnerships with the Hockeyroos and West Coast Eagles AFL Women's team, which is an important way to help raise awareness of organizations like ours to women who might be potential employees. Through our Ausdrill business, we have also placed 3 of the Hockeyroos into our business with flexible hours to accommodate their study and training schedule as they prepare for the Tokyo Olympics.

On to Slide 6, our safety performance. With nearly 8,000 people working across 55 projects, safety is a critical priority for us. As per our principle of no shortcuts, we must do everything we can to send each of our employees home safely every day. We're in the process of rolling out improved critical risk standards and HSE management standards across the group to ensure best practices are followed globally. You can see we continue to report steady numbers at the total recordable injury frequency rate or TRIFR level, with a small uptick driven mainly by reduced work hours as a result of project closures. Pleasingly, the serious potential incident frequency rate is trending down.

I'll now step through some further detail on the performance of the business, starting on Slide 8. At the group level, we had a very strong half, building from strong results in the first half of FY '19. Half-on-half, we increased revenue, EBIT and EBIT margin, whilst ROACE decreased slightly, albeit it is relatively stable. And please note the comparison to H1 FY '19 is on pro forma numbers given we acquired Barminco during the first half of FY '19. What I'd like to draw your attention to is the pie charts, which provide further detail on the composition of our revenue. Australia remains the largest contributor to revenue by country, and gold is our largest commodity by revenue. The chart on the right sets out our half year revenue by project. As you can see, we are not overly reliant on any one project, demonstrating the strength and diversity of our business.

Slide 9 outlines, where I'm sure you'd agree, is the excellent performance of our underground ISG. Across the board, our underground financial metrics are very strong, with top line growth driven by the commencement of ROACE and increased scope at a number of other projects, both here in Australia and in Africa. Importantly, revenue growth has not been to the expense of profitability, with EBIT margins improving to 15.6%. As demonstrated by the results, the acquisition of Barminco and 50% of the AUMS joint venture that we didn't already own has delivered exceptional results and is a credit to our underground team. As mentioned previously, in FY '19, we completed the Barminco integration, exceeded the status synergies, extended contracts and secured new work as well as retaining all key executives. This performance through the integration and beyond has positioned the business well for geographic expansion and further M&A on the proviso it delivers shareholder return.

Turning to Slide 10. You'll see the surface ISG performance is disappointing. Although our Australian surface operations delivered returns in line with our targets, our African surface operations have not. 12 months ago, when I rolled out our business strategy, the need to transform AMS was called out as a separate initiative given the historical challenges within that business. Since then, we have made some progress, but legacy issues and other issues in the half drove the result well down on the prior half and well beyond any improvements that were made.

Transforming AMS remains a priority. We've invested in various initiatives to counter the historic underinvestment in AMS, and I'll talk to some of these in more detail on the next slide and in the strategy section of the presentation. In addition to the initiatives implemented to date, we have commenced a strategic review of the AMS business to look into the structural aspects of the business. The strategic review will be run in parallel to the ongoing transformation initiative.

On a positive side, it is important to note that the surface mining business has secured $550 million of work in this financial year, including the $235 million Sanbrado project. These contracts were won under new management disciplines, and I'm confident that they will deliver value for Perenti and our shareholders, commencing in the second half of 2020 with full run rate in FY '21.

Turning to Slide 11. I'll explain AMS first half performance in further detail with a comparison to the second half forecast. As mentioned previously, the AMS business has been challenged for a number of years. And coupled with a number of significant events in the first half, the performance was well down, with that relating predominantly to 5 key areas. In H1, Boungou delivered a loss at the EBIT level. And given operations have ceased, we expect EBIT upside in the second half when compared to the first. The GMC contract delivered a positive EBIT for the first half. We'll be down on budget given the reduced scope and subsequent termination of that contract. Given this, H2 for GMC will be down when compared to H1. However, on a positive, the team had been able to redeploy some of the GMC fleet to new opportunities and to displace replacement capital requirements. The Sanbrado contract was secured in the first half with operations ramping up throughout H2, thereby delivering a positive EBIT contribution. The AMS overhead is being reduced to rightsize it for the current business with cost reductions delivered in H2 when compared to H1. And finally, in regard to operations, the AMS exploration business has been loss-making for some time, and the team are currently reducing the exploration exposure and pursuing opportunities to sell the business. In addition, the team are also working on lifting operational performance across all contracts.

In summary, whilst the GMC contract loss will have a negative impact on the half, there are other areas that will deliver improvements when compared to H1.

Slide 12 outlines the positive performance of our investments ISG. Our investments ISG performed in line with our expectations. The result was driven by our continued focus on capital discipline and a strong demand for equipment and parts in the BTP and Supply Direct groups. MinAnalytical and Well Control Solutions also performed in line with expectations, and we continue to invest in the Chrysos assay technology, which we believe is a significant value add for our customers and, in time, will generate value through our shareholders.

I'll now hand over to Peter Bryant, who will go through the financials in more detail.

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Peter John Bryant, Perenti Global Limited - Group CFO [2]

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Thanks, Mark. Let me start by also welcoming everybody to the call and to the presentation of the Perenti results for the first half of the 2020 financial year. This time last year, we presented for the first time the results of what is now the Perenti Group. Those on last year's call will remember the complexity of the numbers with material gains being generated as a result of the Barminco AUMS acquisition. Statutory results, they include only 2 months of numbers post the acquisition and a number of other one-off adjustments. This year, I'm very pleased to be able to present our FY '20 numbers that are very straightforward with the exception of tax, which I'll explain shortly.

That said, the numbers on Slide 14 for the 6 months to December 2018 are presented on a pro forma basis so as to provide a meaningful comparison. The results presented on this slide reflect the underlying numbers for the group. There are a small number of adjustments to the statutory result, which I'll explain on the following slide.

Running through the numbers, as per Mark's earlier comment, you can clearly see, with the exception of NPAT, all the results both in absolute dollar terms and in the margins generated have improved half-on-half. This strong performance is reflective of the size and strength of Perenti, the group's ability through its diverse portfolio of projects, service offerings and geographical exposures to have been able to offset the underperformance of AMS during the half.

I'm going to run through all the numbers presented on the slide, but I do want to touch on a couple. EBIT(A), which, as you know, is EBIT before the amortization of intangibles, for the half was $111 million, up 7.7% on the prior corresponding period and a margin of 11%. By reference to others in our sector, this is a very strong margin. To be clear, the EBIT number for the half has been slightly impacted by the adoption of the new leasing standard. This impact has been outlined on Slide 34. But for context, the EBIT impact is less than $1 million.

Moving on to NPAT, the only number that has not improved relative to the prior corresponding period. You'll recall, when we ran through the results 12 months ago, we talked about tax effect accounting, and we talked about the newly formed group being able to recognize carryforward tax losses as assets on the balance sheet. The recognition of these losses generate some material gains that were fully disclosed.

The recognition of the losses on the balance sheet also has an impact on the accounting tax expense booked by the group. Prior to the recognition of the losses, our prima facie tax expense for Australia was not booked. Now that the losses have been recognized, our prima facie tax expense is booked. Confusing, I know. I'm very happy to add further detail during Q&A or in the one-on-ones that we'll be having during the remainder of the week.

In terms of the notional tax expense for the half, it sits at circa 30% of profit before tax compared to 16% in the prior corresponding period. The 30% is in line with the guidance we previously provided and reflects the notional tax rate we expect going forward.

Moving to Slide 15. As I mentioned earlier, the results for the half are straightforward. And you can see on this slide the key adjustments from the statutory numbers to the normalized numbers. Starting at the top right-hand corner, you can see the statutory impact of $38.2 million. We then add back noncash amortization of intangibles to give the statutory NPAT(A) of $57.5 million. There are a number of both positive and negative adjustments that ultimately result in an underlying impact of $60.1 million. The adjustments are all reasonably straightforward and self-explanatory, and I'll note further details are provided on Slide 31.

Perhaps the only 2 items that require some further commentary are the transaction and other one-off costs. The bulk of these costs relate to some residual costs that were expensed in relation to the Barminco AUMS acquisition and some small redundancy costs.

Finally, on this slide, the profit on Connector Drilling. You will recall, we spoke to the sale of this business when presenting the full year results, at which point, it was reflected as assets held for sale in the statutory accounts.

Moving on to Slide 16, which shows our calculation of cash flow conversion. It reflects how much of the EBITDA is converted to cash based on the movements in working capital. As you know, cash back profits, together with ROACE, is one of the key metrics of the business. It's all part of our focus on capital discipline. One of the short-term incentive KPIs for the operational and senior executive staff is, in fact, cash conversion. You'll see for the half, we achieved a conversion rate of 68%, which I can tell you fell well short of our threshold targets. We were disappointed by this result. That said, there were some extenuating circumstances that I'll run through shortly. But before I do -- and I can assure you it continues to be our focus and we expect to see a marked improvement in the full year number.

The cash flow conversion for the half was negatively impacted by the tragic events at Boungou, our decision to exit Boungou and Bissa and the cancellation of the GMC contract. As you'll be aware from our ASX announcements, all these events took place in November and December. And when we closed the books for the half, several residual balances were outstanding, pending the finalization of contracts and site demobilizations. Subsequent to the end of the year, we received $23 million in payments relating to the matters above that were outstanding at 31 December.

As noted in the second bullet point, some balances remain outstanding. The receivables relating to Bissa mine have been received in full, and we have entered into payment plans for the balances due in relation to Boungou and GMC. The amounts due are not in dispute, and we are confident the funds will be received. Finally, on this slide, I should note that the December '18 numbers are statutory, not pro forma, which is why there are some notable movements.

Moving on to Slide 17, which provides you with a bridge from the operating cash flow in the prior page to the net cash flow reflected in the statutory accounts. As with the prior slide, the December '18 numbers are statutory and thus are significantly impacted by the Barminco AUMS acquisition. Running down the column, the key callouts from my perspective are taxation at $22 million, reflecting the strength of the underground business outside Australia. As you're aware, we have tax losses available in Australia to offset cash tax payable, but this is not the case in the various African countries in which we operate. Net capital expenditure for the half was $138.6 million, which you can see from the bullet points included $71.3 million of growth CapEx spent related to Zone 5 and Sanbrado.

We gave full year FY '20 guidance for capital expenditure of $295 million when we presented the FY '19 results. As you are all aware, there's been a number of events that have impacted this number, including the events in Burkina Faso and Ghana. We have successfully sold several of the assets that were deployed at Bissa at or above book value and are working through the finalization of our options in relation to assets at Boungou and GMC. These plans include the sale or redeployment of assets to either generate cash inflow for the business or offset future capital expenditure. In addition to the impact of the above, the group also successfully secured the Sanbrado project, the growth CapEx for which was not fully covered in the original guidance. At this stage, we see net CapEx for the full year landing at circa $240 million, although I note there is still potentially some movement as the items noted above are finalized. Net debt movement reflects a $62.9 million cash inflow relating to funding used to facilitate capital investment. Bottom line, net cash flow for the half, $21.4 million.

Moving on to Slide 18. The balance sheet. There have been a number of material movements between the June 2019 and December 2019 balance sheets, with the majority relating to the adoption of the new leasing standard. As I'm sure you're all aware, the new leasing standard, AASB16, requires companies to book assets and liabilities in relation to certain arrangements that are considered leases. In addition, it requires higher purchase obligations which were previously reflected in the accounts to be consolidated with the new leasing obligations. In the context of Perenti, the material arrangements impacted by the new accounting standard are rental agreements related to the MinAnalytical Chrysos machines and several property leases. These items are disclosed in the financial statements and are summarized on Slide 34. Key takeouts for the balance sheet are: cash on hand of $243.7 million; tangible asset backing of $2 billion, including $1 billion of property, plant and equipment.

Finally, from me, Slide 19, group debt and funding. Our capital structure remains unchanged. As outlined previously, we intend to simplify the capital structure by rolling the existing historic Barminco and Ausdrill facilities into a new Perenti facility. We continue to monitor the debt markets, and we'll move to implement the simplification at an appropriate time. To this end, we have mandated HSBC and NAB to assist us through the possible issue into the Australian bond market.

In terms of the metrics, our reported net debt-to-EBITDA remains at 1.4x. That said, if we adjust the net debt number to remove the impact of the adoption of AASB16, the number drops to 1.3x. Our long-term focus remains to bring this number down closer to 1x.

I'll now hand you back to Mark.

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Mark Alexander John Norwell, Perenti Global Limited - Group MD, CEO & Director [3]

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Thank you, Peter. On the Slide 21, our 2025 group strategy. This slide is a summary of our strategy, which was outlined at our FY '19 half year results 12 months ago. I won't run through all components of the strategy. However, I will provide further detail on the 5 areas highlighted.

Slide 22, transform AMS. As discussed earlier, the performance of AMS is not up to expectations, and it continues to be a priority. We have a new AMS management team in place that is focused on rebuilding the business. The management team's initial priorities have been to address legacy projects, reducing overheads in the business. And to date, a 35% overhead reduction in support personnel has been realized with reductions ongoing. In addition, the team is driving the sale of the loss-making AMS exploration business and redeploying and rationalizing oil fleet. Looking forward, we will only target work that makes strategic sense and delivers value in excess of our financial and operational hurdles. A good example of this is the Sanbrado project secured in the half. In addition to the items already delivered, we have commenced a strategic review of the AMS business beyond the previously communicated transformation initiative.

On the Slide 23, organic growth. We have over $7 billion of work identified in our pipeline. This is spread across 34 projects over 3 years, with the majority of the pipeline in the existing countries in which we operate. In targeting this work, we will continue to drive our enhanced tendering and capital discipline across all opportunities.

Moving on to regional and service expansion, Slide 24. As part of our strategy to be the indispensable mining services company, we consider various options from time to time on how we can best leverage our existing capabilities through service and regional expansion. I'd stress that any expansion will be tested thoroughly to ensure it delivers value to our stakeholders and aligns with our core strategy. We are not interested in growth just for the sake of being bigger. It must deliver appropriate financial returns and, therefore, shareholder value.

We have said before that we want to focus our growth in [less] risk areas. And last year, we expanded into Botswana. Our measured entry into Canada is another example of us expanding into preferred markets, albeit on a relatively small scale at the moment, but we believe this will lead to opportunities to add to our portfolio over time.

Many of you will have read media speculation and our subsequent ASX announcement regarding our interest in Downer mining. As you know, we do not provide full surface mining in Australia. Therefore, the Downer mining business fits our adjacency expansion strategy given its Tier 1 offering and provides significant Australian earnings. If we acquire Downer mining, it could provide a platform that Perenti can leverage internationally. That said and as announced previously, we will only invest in a business if it adds value to our shareholders. I have to stress that there is no certainty a deal will go ahead, but we continue to assess the opportunity.

Turning now to technology-driven future, Slide 25. We're excited about technology and what it will help us deliver to our clients in the future. As outlined, we've recently operated an underground loader in the Goldfields from our Perth office via the Internet, more than 750 kilometers away. We believe this was a world first and is a great achievement. At a strategic level, we will maintain focus on mining technology to ensure we continue to create enduring value and certainty. If done right, technological advances can enhance profitability, reduce the capital intensity of our business and boost safety whilst growing and protecting our market share. Given the breadth of our operations across commodities, geographies, underground and surface, I feel we are well placed to leverage the available technologies and realize value for our customers and shareholders.

Moving on to Slide 26, portfolio review. The various elements of our portfolio are not a set-and-forget approach. They are under continual review to ensure they fit with our strategy. You've seen this with the sale of our Connector Drilling business. From time to time, you're going to see us add to the portfolio or sell components of it. To the extent that we do this, it will have been done with thorough consideration as to whether it's aligned with our longer-term strategic goals. There has been recent media speculation with regards to BTP, our earthmoving parts and equipment business. As you've seen today, this has been performing strongly for the group and is a valued company. We would only consider selling the business if it makes sense to Perenti shareholders, although I stress we have not received any binding offers.

Moving on to the final slide. I'll talk you through our priorities for the second half and reconfirm our guidance. As outlined, the underground ISG is performing very well. However, we don't take its performance for granted. Integration is complete, and we are ramping up a number of new projects with a focus on delivering ongoing strong returns. AMS continues to be a priority for the surface ISG and our business more broadly. We have a raft of actions underway, and we'll be closely reviewing this business along with the strategic review.

We are clearly in a business that requires capital to be deployed to deliver our client projects. Achieving the appropriate returns on the capital has become a mantra within Perenti and will continue to be. That flows through to aspects such as closely managing our working capital, focusing on cash conversion and optimizing our balance sheet.

I'd like to reiterate the full year guidance of underlying NPAT(A) of $115 million to $120 million as announced in December 2019. The net CapEx target for the full year is $240 million. And finally, we will continue to remain disciplined in implementing our strategy to create enduring value and certainty.

I'll now hand back to the operator before taking any questions.