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Edited Transcript of BLY.AX earnings conference call or presentation 27-Aug-19 10:59am GMT

Half Year 2019 Boart Longyear Ltd Earnings Call

Salt Lake City Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Boart Longyear Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey R. Olsen

Boart Longyear Limited - CEO, President & Executive Director

* Miguel A. Desdin

Boart Longyear Limited - CFO

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Conference Call Participants

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* Matthew Chen

Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst

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Presentation

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Jeffrey R. Olsen, Boart Longyear Limited - CEO, President & Executive Director [1]

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Thank you, Vincent. I'm pleased to welcome you to the Boart Longyear Half Year 2019 Results Announcement. My name is Jeff Olsen, and I'm the President and CEO of Boart Longyear. We will have a short presentation, and then we will have some time for questions at the end.

So before we begin, I'd like to draw your attention to the picture on the title slide. We often highlight some of our new technologies on the cover of our presentations, but we feel we have some great employees at Boart Longyear that are responsible for the success we've had, including some great safety results we're having this year. We'll talk more about safety, but it is the people of Boart Longyear that are responsible for the successes we are having.

Slide 2 is the standard disclaimer. The announcement may contain certain forward-looking statements such as looking -- statements forward-looking not -- are not guarantee of future performance, and there could be no assurance that actual outcomes will not differ materially from these statements. So please ensure that you've read this statement.

Okay. Moving on to Slide 3. Boart Longyear has a long history. We've been in the business now for almost 130 years, and we are proud that we have been able to help the mining industry expand its ore body knowledge. By firstly drilling, we certainly have -- are known for being strong drillers just about everywhere there is on the planet and in all types of drilling.

We also provide valuable tools that help our customers understand their ore bodies better, and by pioneering drilling equipment and tooling that makes discovering and mining more efficient. So that's who Boart Longyear is.

Slide 4, let's talk about some of the highlights of our performance in 2018. We should probably call this the green arrow summary page, lots of green arrows on this page. Miguel Desdin, our CFO, will go through our financial results in more detail, but let me give you a few bullet points around the highlights.

All financial and operating performance measures are significantly and measurably improving. Volumes are improving, not at the same pace as last year, but adjusting for foreign exchange and countries that were exited in 2017 and '18, volumes were improving by about 5%.

Net profit after tax has returned to profitability for the first time in 7 years. This includes some very strong years -- revenue years in that period. Adjusted EBITDA for the first half has improved by 58% over 2018 first half, including the implementation of IFRS 16, which is changing the accounting for operating leases.

Operating cash flow improved by $32 million from the first half of 2018. This is always important to us. This means that we continue to improve our margins largely without the help of price, which is only keeping up with inflation in this point in the cycle.

From a strategic perspective, all our debt maturities, including our new upsized asset-backed loan, have been extended through to the second half of 2022.

We've also announced today our intention to seek a share consolidation or reverse split of our shares. These are positive steps along the road to improving our balance sheet. In 2018, we had the fewest number of lost time incidents for the company, resulting in an LTIR rate of 0.10 per 200,000 man hours, and we are obviously continuing that trend into 2019 with no lost time incidents so far this year.

This represents well in excess of 10 million man-hours, actually closer to 11 million man-hours without an LTIR, something every employee of Boart Longyear is very proud of. Our total case incident rate is also very good and continues to trend downward, and it is the lowest since our listing on the ASX.

We are very transparent about our safety numbers, which is built into our safety culture. This is something you may not see with most of our competitors. I have said this before that I am confident that Boart Longyear's safety systems are world-class, and we are continuously improving them and seeking to simplify them to make them easier for our people in the field to follow.

Let's move on to Slide 5 and talk a little bit about Drilling Services. Revenue in our Drilling Services group in the first half was up marginally over 2018. Adjusting for impacts of foreign exchange and discontinued operations, fundamental revenue growth was just over 4%.

I am encouraged by what we are hearing from our customers in seeing -- and seeing regarding bidding activity for the remainder of 2019 and into 2020. A 46% year-on-year improvement in EBITDA for Drilling Services and a 6% increase in EBITDA margin are good evidence of clear operational improvements across the business.

Our TruProductivity initiative is designed to improve visibility into our operations and improve our response times and help us better achieve our performance targets.

Moving on to the Products side of our business. First half in our Products group is lower than the first half of 2018 first half revenue, due in large part to significant onetime sales of slow-moving material that occurred in the first half of 2018 and were not repeated.

We see a similar fundamental growth rate in the Products business, around 5%, as we have seen in the Drilling Services business, when we adjust for those inventory sales in 2018, foreign exchange movements and countries that were exited in 2018, really putting those revenues on a like-for-like basis.

We are pleased with the increase in backlog orders over -- year-over-year, which we feel is good news for the second half of 2019. Strong margin growth by 3% is a combination of cost management initiatives and the absence of the 2018 inventory sales. Underlying growth of EBITDA strongly improved by 13%.

I would now like to turn it over to Miguel Desdin, our CFO. Miguel will give us more detail on the financial results. Miguel?

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Miguel A. Desdin, Boart Longyear Limited - CFO [2]

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Thank you, Jeff. Turning to the financial highlights. For the first half, on Page 8, you will see significant improvement in the company's financial performance year-over-year, which was driven by disciplined cost control, commercial initiatives and stronger demand.

Revenue for the half year was up 4.6% after adjusting for the impacts of foreign exchange, previously discontinued operations and sales of slow-moving inventory. On that basis, revenue in the Products and Drilling Services businesses improved 5% and 3%, respectively.

Adjusted EBITDA grew meaningfully from $37 million for the first half of 2018 to $58 million for the first half of 2019 as a result of the improved revenue and reduced costs. First half cash from operations of $20 million improved $32 million year-over-year and was larger than full year 2018 cash from operations.

We saw an improvement in net working capital as a percent of revenue of 1%. Capital expenditures for the half year totaled $22 million. And net debt increased $81 million year-over-year, primarily driven by PIK interest of $48 million and $32 million from the adoption of the new lease accounting standards under IFRS 16.

Turning to Page 9 on the revenue bridge, you will see the $17 million or 4.6% improvement I touched on a minute ago, which was primarily driven by increased price year-over-year.

While on Page 10, you will see the flow-through benefit of the cost savings initiatives as well as the benefit from additional price, which as you can see offset inflation.

On Page 11, I'd like to point out that even as PIK interest has increased the absolute amount of debt over the last 3 years, the company has experienced a substantial improvement in the net debt-to-EBITDA ratio facilitated by considerable EBITDA growth.

I would also like to remind everyone that this year, interest on the company's senior secured notes converted for PIK interest to cash interest payments, and the interest rate on those notes decreased from 12% to 10%. Separately, while the interest on our term loans A and B remain payable as PIK, the interest rate on those decreased from 10% to 8% this year.

I would also like to point out that after the half year concluded in early July, we closed a new ABL deal with PNC Bank, which increased the nominal size of our asset-backed revolver from $50 million to $65 million at closing and, ultimately, $75 million as certain leverage targets are met. Upon closing the deal, we used $5 million under the new facility to pay down the Backstop Term Loan. And as part of the deal, the maturity on the facility was extended until July of 2022.

Secondly, we also addressed the maturity on the Backstop Term Loan, which was also extended and is now set to mature in October of 2022. Because of those activities, we now do not have any near-term maturities in our debt structure.

Finally on Page 12, you will see the year-over-year liquidity bridge. For the second half, we had $50 million of cash generated from operations; $20 million used for working capital, primarily accounts receivable; $10 million used for interest and taxes; $22 million of capital expenditures, which have been netted down by $3 million of asset sales; and repayments of -- on the ABL of $11 million, leaving $19 million available in the facility at the half year. All of that resulted in a half year liquidity balance of $48 million.

That concludes my remarks on the financials. I'll now turn the call back over to Jeff.

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Jeffrey R. Olsen, Boart Longyear Limited - CEO, President & Executive Director [3]

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Thank you, Miguel. Let's talk a little bit about industry fundamentals now on Slide 14. We continue to look at many leading indicators for the industry, and we select a couple at each one of these presentations that we think are particularly important.

The chart on the left shows that the net debt-to-EBITDA ratios for the industry are improving. Clearly, our customers have delevered significantly in the last 4 years. This gives them more options to invest in their own businesses.

Having said this, the chart on the right illustrates that only recently have mining companies begun to reverse the trend of CapEx spending. The ratios of CapEx to depreciation remain well below historic levels, those ratios remain well below historic ratios and absolute capital spending remains at or near 2007 levels. Our customers have stronger balance sheets and now have the capacity to reinvest in their businesses.

On Slide 15, there's a little bit more about industry fundamentals. Here, you can see the price trends for our 2 key commodities, gold and copper. Combined, this year, they account for a little more than 80% of our current revenue. The revenue attributable to gold in our business is pretty high this year given historical standards.

When we combine these prices and weight them by our current revenue profile by commodity, you can see a clear upward trend in 2019 over historical weighted pricing. This chart, combined with the 2 on the previous slide, tell you why we are optimistic about the future for Drilling Services and Products.

There is even more reason to be positive. If you couple this with the fact that the industry production-to-reserve ratios for gold companies have declined by 5 years in the last 10, we have showed this chart on previous presentations.

So let's move on to one of the things I very much enjoy talking about, and that is the innovation that we're working on in Boart Longyear. We make a point of spending some time in these presentations on innovation because we're very proud of the products and services that we have introduced into the market. Boart Longyear has always been at the front -- forefront of innovation in our industry.

Our Geological Data Services is all about helping our customers improve their ore body knowledge. We have several instrumentation project -- products, including TruCore and TruShot that have been well received in the market, and several others that are in various stages of development or market introduction, such as our Wireless Sub, laser aligner or gyro solutions.

TruScan, our on-site assay solution, is key to Geological Data Services and has seen tremendous growth and acceptance in the industry. You will continue to hear a lot about TruScan from us. And increasingly, you are hearing the benefits of this technology directly from our customers, as they talk about how they will be using this technology to improve their own ore body knowledge efforts in advanced exploration.

We have introduced into the market in the last couple of years some exciting, innovative and new tools, such as our Longyear Diamond Bits, which we are seeing tremendous growth in; our XQ drill rods, which are the best drill rods out there; and new rigs such as the LF160 or the MDR700. We're also close to introducing our intelligent rigs across multiple rig platforms.

For services, I spoke a little bit already about our TruProductivity initiative to improve productivity at the drill rigs. Additionally, we have innovations such as the MDR500, which give us an advantage in underground diamond coring. We're also looking toward the future, which is not so distant, to the next generation of drilling technology, which is fully autonomous.

So moving on to the summary slide on Page 17. This brings me to the conclusion to today's presentation, and after which, we'll have some time for questions.

Firstly, we achieved a world-class LTIR rate of 0 year-to-date. No LTIRs. We are very proud of our safety systems and we are relentlessly seeking to improve our performance.

We continue to expand on improvements we have made in recent years, with adjusted EBITDA improving 58% on the first half 2018 performance. Strong improvement in net cash flow from operating activities that allows us to invest more in our own business.

And as I've said before, with better margins from improved costs, Boart Longyear is in a good position to benefit as the market improves.

And our markets are improving. We see shortages in reserves, improving balance sheets at our customers and underinvestment in the industry over several years. These facts, coupled with very strong gold price, mean that they're -- that we are positive at our -- about our potential in the future.

We recognize that our absolute debt levels are too high, but we are generating cash through operations and, importantly, a strong track record of financial improvement. We're excited about our new technologies and are investing to grow them. We anticipate that our new data tools, which we call GDS, will become meaningful -- a meaningful part of our business for Boart Longyear in the future.

We're proud of these results and the track record we have demonstrated, and committed to improving this business even more. And so with that, I will open it up for questions. Vincent, can you help us with that?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [2]

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It's Matthew Chen here from Foster Stockbroking. Congrats on the results. Just a couple of questions. So in the products, I think you sort of called out that 1H '18 included some slow-moving inventory and discontinued entities revenue. And I think judging from your comments, that sort of 5% is the growth rate if you restated essentially. What's your view on sort of products going forward into 2H '19 and further along than that in terms of top line growth? Have you got any sort of concerns about that? And are the new products going to, in some way, sort of help that along? What's the sort of time line for the development and being in markets for those new products?

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Jeffrey R. Olsen, Boart Longyear Limited - CEO, President & Executive Director [3]

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Yes. Thank you, Matthew. Listen, I feel pretty positive about Products going forward. You can see the backlog numbers versus a year ago. Last year was a bit of a different year from us on the profile of products. We started the year with some bigger numbers, mainly driven by slow-moving inventory. And towards the end of the year, we recognize that some of our customers on the Products side had built up a little bit more inventory and they weren't selling that through. So we increasingly had a tougher year. This year, I think it's going to be more like historical patterns in our selling of our Products business. We think that we're looking fairly positive for the second half of the year.

And your question around the new products, I think, is very relevant. I'm very excited about the new Longyear Bits. They are very important for us. A significant portion of our demand, which is where we can see that as we look at the demand on the production facility, which is here in Salt Lake City, is on the new bits rather than the old bits. And I think that is very telling about the future of that product line.

XQ rods, I think, are ideal in the marketplace, particularly for deep holes and any rod-handling applications with the improved thread on the ends. These are great rods because you can drill deeper, they're lighter rods, W-Wall design. So we think this is a good pattern for our products business going forward.

And then if you look at the rigs that we have out there, I think we hit the mark on a couple of our rigs that we've introduced in the last couple of years. They are in high demand out there. And we continuously have new things that we're going to be bringing into the marketplace. I've mentioned the intelligent rigs. And we have new concepts out there that we're working on at all times. I think that's very important. We'll continue to refresh our product lines. But I think it's going to be a strong business going forward. And as you know, I mean, it's going to get stronger, particularly on the exploration side as exploration activity improves.

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Matthew Chen, Foster Stockbroking Pty Ltd., Research Division - Equities Research Analyst [4]

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Yes. Yes, certainly. And I think that's a nice segue into like the sort of second part of my second question is, but are you saying -- or are you able to call out sort of improved drilling activity in particular areas? And in particular, can you update on -- I know in the past, you've sort of talked about Canada as a hope for you, juniors and then also the market sentiment around gold, if you could expand further on those.

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Jeffrey R. Olsen, Boart Longyear Limited - CEO, President & Executive Director [5]

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Yes. So let me say a couple of things about that. Let me talk about your regional question now first. Certainly, we have not seen yet strong participation from junior miners. So we're not seeing that yet. Having said that, we are seeing some prospectivity in projects with some of the bigger players in Canada that are coming up. And increasingly, a few smaller players as well, not to the extent that we would hope that the juniors would be in that market. And Canada is where you would look for that market to come back, probably, first, it might be the bellwether for the junior market.

We are seeing good activity across all regions. Obviously, if you look at where gold prices are at today, anybody whose costs are denominated in another currency other than U.S. dollars is probably doing very well in the gold market right now. So I'm not going to call out any specific areas of concern regionally or specific areas of brighter spots. Although I will make one comment that says that I think that North America is pretty prospective at the moment.

So having said that, when I -- when you talk about gold specifically, you know there's been some mega-mergers and some of those mega-mergers, each of those companies -- and there's really 3 that you have to think about. You think about Barrick-Randgold, you think about Goldcorp -- Newmont Goldcorp and then you think about the Nevada joint venture, right? And when you think about that, they've all got their own list of what priority projects that they're working on. And when you put them together, they have to sort of reprioritize their lists.

So in many ways, I think we haven't seen the impact of those mergers yet. We've seen some uncertainty. I think we've experienced that in the last couple of months, and probably we will experience a little bit of that in the coming months. But I think in the medium term, pretty quickly, and in the longer term, I think those are both -- those are all very positive events for our industry. So we feel pretty good about that. And of course, they may divest some of those assets and the new owners will also want to give those assets some attention as well, and that generally means drilling.

Any other questions? So if there's no more questions, I think we'll end the call. Vincent, you see any other questions?

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Operator [6]

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No, I do not.

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Jeffrey R. Olsen, Boart Longyear Limited - CEO, President & Executive Director [7]

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Okay. Well, thank you very much. Thank you for joining our half year results announcement. We're happy with the results, and thank you for your participation. Goodbye.