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Edited Transcript of EHL.AX earnings conference call or presentation 21-Aug-19 1:00am GMT

Full Year 2019 Emeco Holdings Ltd Earnings Call

Western Australia Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Emeco Holdings Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ian M. Testrow

Emeco Holdings Limited - MD, CEO & Executive Director

* Justine Lea

Emeco Holdings Limited - CFO

* Thao Pham

Emeco Holdings Limited - Chief Strategy Officer

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Conference Call Participants

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* Alexander George Philip Karpos

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Hamish Murray

Bell Potter Securities Limited, Research Division - Analyst

* Marc Rabinov;Lismark Nominees

* Mitchell Sonogan

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Emeco Holdings Full Year 2019 Results Briefing. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Managing Director and CEO, Ian Testrow. Thank you. Please go ahead.

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [2]

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Thank you, and thanks, everyone, for dialing in. First of all, today, I'd like to thank the Emeco employees. We really do have a fantastic team of dedicated employees that work particularly hard and work fantastically as a team and I'm really proud of them and I should be really proud of this result because it's an output of their hard work, dedication and commitment. So thanks very much to the team.

So just getting straight to results. We're happy with the results. It's a good, solid year. EBITDA up 40% to $214 million; EBIT, up 50% (sic) [51%] to $125 million; and operating NPAT, obviously, well up to $63 million. So we're really happy with those numbers. We worked really hard to achieve them.

Just on the EBITDA margin increase from 40% to 46%. We're really pleased about and what that -- it's a reflection of is-- we have some cost to absorb in this last 12 months with regard to parts and labor. And it's real testament to how this team works together and the way that we manage cost, our disciplines, our continuous improvement, focus. We're always asking ourselves, "How do we do things more efficiently? How can we do it differently? Now how can we improve the quality of our product, et cetera?" and so to be able to get an increase in EBITDA margin against the backdrop of cost increase, it's pretty special and very, very proud of that. And doing that whilst creating win-wins with our customers as well, coming up with proposals that are tailored to our customers' needs that gives them a win and contributes to the operation and obviously, improves us as well. That's thing that really drives me, is continuous improvement, focus on those win-win deals off the back of having bloody good equipment and excellent services.

Strong operating cash flow was particularly pleasing and putting that cash to work in buying back up to [$15 million] of bad debt. And also, I'm investing about $18 million of growth CapEx is in the year -- is particularly pleasing as well. And then our growth CapEx, just as a reminder, was a bunch of much inflated core assets. We bought them particularly well. I think it was a 17% to about 20% IRR on average. We did that for our procurement-type ability of finding assets around the world and we did that well for our connections and Dan Jauncey from Matilda's connections around the world and we bought these assets. We found them and we brought them in and we rebuilt them for our Force workshop and did that under budget. I'm particularly pleased around -- and I think we forecasted about a $90 million spend. It's going to come in around $85 million-ish, so I'm particularly pleased with that. So the gross CapEx for this is going to be about $80 million -- sorry, not the gross CapEx, but the growth CapEx.

So that's an investment that sets us up for many years. They're good assets. They're absolutely in-demand assets. I'm very, very proud of our ability to invest like that to project manage those is, the import and the rebuild of our equipment.

Very, very pleased that our de-leveraging momentum has continued down from 2.6x to 2x off the back of spending $80 million of growth CapEx. De-leveraging is important to us. We certainly didn't lose focus on that for our allocation of growth CapEx and investment in the business but well and truly back on track to continue that de-leveraging. Now we talked about 1x target, 1.5x target running into FY '20, heading down towards 1x. It really is a strong focus for us moving forward. And not only for growing our earnings, but also particularly proud of the fact that we bought back some debt this year. It's about AUD 50 million to buy back some bonds.

So that deleveraging story, moving forward, and that discipline around our CapEx -- there's not going to be any big lumps of the growth CapEx in the foreseeable future. We'll be working very hard to get that capital structure right through for growth and also through reducing that gross debt. Such strong focus.

The metric that I'm personally most proud of, and I think the team is as well, is our return on capital 21%. Now historically, this business through previous areas of Emeco -- I've checked, around 11 or 12 tops highs in IRR. Like, to get 21%, it really a function of the way that we're doing business. It's a function of how we've embraced our engineering capability, our asset management, asset planning, the Force workshops and how we rebuild equipment and how we rebuild equipment through multiple cut kind of turns.

We really focused very, very hard in getting every dollar out of our every dollar spent of that CapEx. And we focused it, we push it down through the business. All our discussions around management meetings, our return on capital, where we're sitting versus IRR, so also graphs. Where are these asset sitting on its return on capital. Each type of asset, or each asset type, or which projects or which regions, it's become part of our language and a part of our focus. So then the capital intensity business, that's really, really important. It's just another example of the discipline this management team has and the focus that I'm very proud of.

The other thing that I don't mention there, is we achieved 56% increase in activity for our workshops, which is fantastic and that demand is building as well. It's a combination of rebuilding our own equipment to achieve that growth and get our cost down and our securities, supplier and critical components but also to provide that sort of rebuild capability for our customers as well, which I think it's really cool. Having that extra touchpoints for our customers widen our value proposition for our noncapital return-intensive earnings. And it's something we're really, really proud of. And Aussie -- our [Porsche Headland] workshop on Monday, and the guys that have been working there for a long time told me they've never seen it. So the bays were full. There's a hell of a lot of good work going on and it's really cool to see.

So as we move on to outlook and strategy for FY '20. I want to just touch on outlook first and then I'll come back to the strategy at the end of this presentation. We'll be seeing continued strong demand. Demand remained strong on the East Coast. We're working hard with our customers to create value, particularly in met coal, we're seeing strong demand. Our customers are -- have a hell of a lot of discipline as well. That's what we've seen, and they really are risk-averse in regard to splurging CapEx. They're very, very disciplined on that which has made our rental model an attractive value proposition. So we hard -- work hard to really increase that value. So we're seeing good demand on the East Coast.

What we're excited about is actually seeing better demand on the West Coast, and we have some time, particularly in iron ore. I mean I mentioned our 100 pieces of equipment. I think we've placed 50-odd in the last few months and there's another 50 that we're about to sign some contracts on and put to work.

The first half would be a fair bit of churn regard to getting that gear to work a lot around project management, but the buildup on the West Coast, particularly in iron ore, is particularly pleasing to diversify our business which is a really good thing for us.

Growth assets, they've -- we've put those growth assets in, we've put them to work. I think it was 14- to 40-tonne trucks. We've actually held 5 of them to transfer to the west. We originally brought them over and sent them to Brisbane and put them all to coal, but we considered it to be strategically wise for us to actually classify them into iron ore. So we're doing a bit of work on that at the moment. So that's particularly pleasing for us.

So that's pretty much our year moving forward. We'll continue to build the business, continue to focus very strong on our cost control. We'll continue to service our customers on the East Coast, but also transferring our equipment, the growth assets, and other bits and pieces. The completion of some long-term projects in the West gives us an opportunity to meet this demand and we're very excited by it.

If we just turn over to people and safety. This is on Slide 4. I say this every 6 months, but it's actually the way we are with people and safety of our people and the health and safety of our people is absolutely everything for us. It's imperative. It's crucial. And I'm very happy to say it, too, to announce 0 lost time injuries again.

Just want to talk about the TRIFR increasing from 1.2 to 4.6x -- so sorry, 4.6 in the last 12 months. Well, actually, it's a disappointing result. It was like injuries associated with like, cuts and bangs and sort of minor-type injuries that are plenty annoying and we really care about this. We really need to make sure that people are taking care of themselves and we're setting up a safe work environment. We're doing -- we're not sitting here idly watching this happen. We're allocating resources. We're actually going to double the size of the HSE team for resources -- dedicated resource into our shops and into our regions, really increase what we are doing. We just put on someone to coordinate all that activity to make sure there is consistency and best practice. And so there will be a lot of work on that, and I'm confident that we'll sit in front of you in the next periods and talk about how that TRIFR number is going down.

People. Now look, it's a capital-intensive business and we focus on rock and but it's all about people. It's the people who get close to our customers. It's our people that have empathy for our customers and tailor solutions for them and work with them to track value for their projects. And it's our people that provide that craftsmanship and planning to make sure our assets were performing at their best and we're at the lowest cost. So people are crucial to our business and we continue to invest in them.

Increasing our workforce. Very, very happy that we're increasing our apprenticeships. We need to look at sustainability. We need to contribute back to the industry as well. And I would like to see that increase further and further over time.

Female representation has increased by 51%. That's great. So we value diversity, we embrace it. And within this year and hopefully, in not-too-distant future, I would like to announce to the market that we're going to be appoint another nonexecutive director and I think it will be a great if we can bring a female to that role as well. We enjoyed the diversity of our former female Director, Erica Smyth, and it would be great to be bring another lady into a nonexec role to contribute to the business and our evolution.

With that, I will hand it over to Thao Pham

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Thao Pham, Emeco Holdings Limited - Chief Strategy Officer [3]

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Thanks, Ian. Just moving on to Slide 6 of the slide deck. Basically, we've broken up the group results into our 2 main businesses: Rental and Workshops.

So just starting with rental on Slide 6. Basically, this makes up 80% of -- 86% of the group revenue. Revenue was strong. It was up 24% on last year. And basically, the rental division continues to be a very strong business for the Emeco group, driven largely off the back of very strong demand from our met coal customers. Earnings were up; EBITDA, up 39%; operating EBIT, up 45%. So I think that's really fantastic result for the group.

The strong earnings growth was driven largely by utilization. Utilization was up from 58% last year to an average of 64% this year. And just to clarify, 90% of our fleet, on average, is out working as indicated by our gross utilization number. Our rates continue to be strong and we continue to improve rental rates, and then that's contributed to our margin increase. And then obviously, as Ian mentioned, there continues to be a very strong focus on type of controls and making sure that we're very disciplined in that regard.

Across the Rental businesses, we also noted that contract tenure continues to be strong for us. We're signing up contracts of up to 3 years. On average, it's about 18 years -- 18 months. Off the back of the strong earnings, you can see that our margins have also increased significantly. Operating EBITDA margins, up 11 points to 58%; EBIT margins, up to 36%. So we're very proud of that.

In terms of FY '20, as Ian mentioned, the Eastern region continues to be very strong for us. Met coal continues to drive that, so we'll continue to build on that. And then the Western region will be building over the course of FY '20, so we do see growth in earnings half-on-half as we move into FY '20.

Just moving on to Slide 7, where we've broken out the Eastern region. Again, it's another great year for the Eastern region, which makes up about 70% of the Rental business. EBITDA is up 51% from FY '18, now sitting at $184 million. This is largely driven by operating utilization, which now sits at 69%. So quite strong and again, particularly in the met coal. We continue to improve rates and most prices continue tight cost controls in order to ensure that we've got strong earnings.

Then we also note that in the first half, we announced that we're transferring some assets from the West Coast over to the East Coast. So that contributed to earnings as well. And then obviously in FY '19, we picked up the Matilda equipment business which mostly contributed mostly to the Eastern region.

Looking into FY '20, we basically continue to see good growth in earnings, continued strong demand, particularly as customers remain quite disciplined with their capital allocation. And I'll talk a little bit about the Western region next, but obviously demand is building over the Western region, so we also see a really good opportunity as well to cash in on that and transfer some assets and deploy some assets into iron ore and gold for some strong commodity diversification for us.

We're also seeing some opportunities as well in the hard rock in the Eastern region, so in gold and copper and also opportunities in large-scale civil projects. So we'll explore those opportunities and definitely, we look at how we can participate and further diversify our commodity portfolio.

Over to the Western region, Slide 8. I guess in FY '19, despite large projects coming to completion and winding down over the course of FY '19. The Western region still managed to achieve solid growth of 7% in operating EBITDA. So within -- the team has done a great job to achieve this, given the book and we're very proud of that.

In FY '20, we will basically remain focused on building up and redeploying fleet that have come off these projects into new projects. And in FY '20, we see the Western region building up over the course of the year. As Ian mentioned, we've already been awarded and placed up to 100 bits of kit out on to projects. So that will be ramping up over the course -- largely, the first half of '20 and will require some assets from the East and then also put our growth assets to meet this demand. And then moving forward, we still continue to see further opportunities. Over in the Western region, there's still a lot of activity, lots of bidding activity. So the outlook for the Western region is strong.

Moving on to workshops, Slide 9. So basically, we acquired the Force business in November 2017. So FY '19 saw the first year of full contribution from the Force workshops. In addition to that, we did expand the capacity of the workshops as well. We converted to original Emeco workshops into Force workshops. And then we also expanded into an additional facility over on the West Coast.

Basically, the workshop's activity has been very strong and it's increased significantly in FY '19. It's up 50% -- 56% against FY '18 on an annualized basis. So that's a massive increase in terms of workshop activity. As a result, we've put a lot of our own internal Rental fleets through the workshops and increased the internal works and built on our Retail work as well for the customers. I mean the workshops have been great and continues to be great for the Emeco Group, provides us lots of value, the Retail works, obviously, provide us with low, capital-intensive earnings, some diversification in terms of earnings as well. And then more importantly, it just provides -- allows us to provide a wider service offering to our customers, those additional touch points, and that's great for us.

In terms of internal works, that's increased from 40% in FY '18 to 45% in FY '19, of the total workshops activity and that's been crucial for us, to have that capability and ensure that all our critical components available so that we can ensure our fleet is working at all times, minimize that downtime and be able to have our customers using our equipment for their operations.

In terms of operating EBIT, the way the numbers are calculated basically, the retail works absorbs 100% of the cost notwithstanding that the workshops performs internal works as well. So where we end up with is $4.7 million in EBIT contribution from the workshop and that's purely from the retail earnings, post 100% of the overheads.

So most -- we have -- I did note that the internal work has increased as a proportion of total activities, so that's impacted margins. But going into FY '20, I mean, we will continue to increase the activity going through these workshops, given the value that it provides. So you'll see activity increasing into FY '20.

I will just now pass back to Ian to talk through the value of the workshop as part of the Emeco asset management capability.

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [4]

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Thanks, Thao. Good job. Yes. Turning to what really changed in Emeco from previous year.

Firstly, the acquisition of Force has been very, very good for us and the workshops. It's added a lot of value to us, (inaudible) to our customers as well as to our fleet, our ability to rebuild the equipment and rebuild our own components has significant impact on our cost and our quality, our return on capital, and our security of supply as well in a tight market. So it's been fantastic for us.

But we've also invested a lot in our asset planning, disciplines about measure to manage, our use of technology, our centralized planning system, our relationship with our partners, (inaudible). And I'm really excited by that. I think that's something that we've got to absolutely double down on because our aspiration business is to be the lowest cost and the highest quality provider of earthmoving equipment in Australia.

And if you have a look at the graphs on the left hand side, we're increasing our ability to manage the components, where we sit on the histogram. And also we're reducing our cost compared to the benchmark as well. So these investments are for our sustainability around making us the lowest cost, highest quality provider and really cranking that return on capital because that's our key to sustainability.

Okay. I'll just hand over to Justine Lea right now to talk about the financial results.

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Justine Lea, Emeco Holdings Limited - CFO [5]

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Thanks, Ian. Going to the profit and loss on Page 12. Emeco generated $464.5 million in operating revenue to FY '19, underpinned by the increase in average operating utilization to 64%; the acquisition of Matilda and expansion of Force workshop; and strong demand from customers in metallurgical coal, improving the business' commodities diversification with met coal now representing 42% of growth revenue.

Operating EBITDA of $214 million was very pleasing with operating EBITDA margins of 46.1% compared to 40.2% in FY '18, which was achieved with a contribution of Matilda's high-margin earnings combined with the innovative win-win customer contract structures and a continued cost discipline for us.

As Thao and Ian mentioned, this discipline is ingrained in the Emeco culture and supported through a centralized planning, procurement and continuous business improvement.

This strong performance translated to an operating EBIT of $125.4 million. After taking into consideration net finance costs, we achieved our best operating NPAT result since 2012 at $63.1 million, up 214% on FY '18. We also remain very disciplined in our allocation of capital with our key metric, return on capital, up 140 basis points to 21%.

Looking at the cash flow slide. Emeco's strong cash generation in FY '19 enabled us to not only repay debt but also invest in $85 million worth of strategic, in-demand growth assets. This strategic growth equipment will provide us with significant earnings over the next several years.

Excluding this $85 million in growth CapEx, Emeco's free cash flow is nearing the $100 million mark. The business generated $90 million in operating free cash flow at FY '19 compared to $78 million in FY '18, driven by strong operating EBITDA and improved working capital management, partially offset by the higher sustaining CapEx and larger fleet pull-in rates of business acquisitions. By improving our management of debtors and creditors and it has a provision of work in progress to cash, $21.4 million of working capital was released in FY '19, which is huge. We (inaudible) unwinding in FY '20 due to the growth in operations and around $8 million of growth asset payments up that will be paid in FY '20.

The net level of sustaining capital expenditure has grown to $88.5 million, reflecting the larger fleet size, increased utilization and current market conditions. This figure consists of our sustained business CapEx associated with component rebuilds and it's been offset by the disposal of noncore and end-of-life assets as we continue to optimize our fleet. Going forward, we expect to see the net sustaining CapEx broadly in line with depreciation.

The company also invested in critical component inventory during the year, to secure supply in the tightening market and ensure availability, making sure that we minimize downtime.

From a cash tax perspective, Emeco still has $260 million worth of annualized tax losses, and is not expecting to pay cash for the next few years. As you can see through the cash flow results, we remain focused on maximizing our conversion of EBITDA into cash, aggressively deleveraging, so that the company can refinance our debt with more attractive terms.

If we go to the balance sheet slide. Emeco has reduced its net debt to operating EBITDA ratio to just below 2x from 2.6x at 30 June 2018, demonstrating our focus on deleveraging, notwithstanding the investment in growth assets that were funded through our operating cash flows and finance leases.

During first half '19, we reduced the outstanding balance of our senior secured notes by USD 33.8 million down to USD 322 million. And we also successfully refinanced our revolving credit facility and upsized it from $40 million to $65 million. This improved its pricing, tenor and terms with a 2-year extension option from September 21.

This refinancing also allowed Emeco to fully hedge its notes at an average exchange rate of $0.729, protecting the principal debt and interest amounts from fluctuations and exchange rates, with annual interest expense now approximately $45 million.

The improved operating performance, acquisition of Matilda, our investment in growth assets has strengthened Emeco's balance sheet with a net asset position of just under $200 million as of 30 June 2019.

Our financial position today highlights the progress we've made in building a sustainable business, and strengthening our balance sheet and achieving leverage of under 2x, putting us in a strong position to refinance our debt on materially better terms.

I'll now hand back to Ian.

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [6]

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Thanks, Justine. Look, I just wanted to warm us up by just talking about our overall strategy moving forward. It's really 3 pillars that we're focused on in the next 12 months. It's, we're obsessed with being the lowest cost and highest quality supplier of equipment and the best of what we do in the industry. It drives us. So we'll continue to focus on that. We'll continue to look at continuous improvement opportunities, to reduce costs. We'll continue to be more efficient. The impressive technology, our planning, use of our workshop, optimizing our inventory. There's a massive amount of work that goes on in the background around optimizing all of these elements of our business. And it's all about getting the lowest cost and highest quality, which gives us a strategic advantage in the industry. And then we use those pillars and those equipment to work really closely with our customers, to tailor solutions, to come up with more creative deals than our competitors. And I'm very proud of the fact that we're increasing our margins while increasing our value to our customers. It's absolutely what drives us. So we'll continue on that path. And what you see there in the result is our hard rock, and that's a game changer for us. Being able to rebuild our equipment, turnover -- multiple components turns to achieve a high return on capital. It's all about sustainability and creating value, and that's an excellent measure.

Secondly, and specifically in FY '20, as Thao mentioned, there is opportunities in the West. That's all about project management execution for us in the first half. We've had some long-term projects reach their natural end, and we got an opportunity to put equipment into new projects, predominantly in iron ore. We're very excited by it. We're excited to work with these customers. And it's all about project management, to get the gear in, cost effectively, cyclically most important, and to give our customers the best chance to getting productivity from that equipment and creating value. So that'll be a key focus for us in FY '20.

And thirdly, Justine mentioned, deleveraging, important news for us. We talk about sustainability, we talk about creating value, getting it. Optimizing our capital structure is critical for us. So what I think that also was really cool about FY '19 is the fact that we bought some of our bonds back. We'd like to really double down on deleveraging by growing the business, but also looking for opportunities as we come out of our noncore period to reduce our gross debt as well. We're generating a lot of free cash, putting that free cash to work for us and investing in our sustainability moving forward is our absolute objective.

So that's it for us. I'll hand over to -- for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Mitch Sonogan from Macquarie.

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Mitchell Sonogan, Macquarie Research - Analyst [2]

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Just to start off, it sounds like there's a lot of kick in those upcoming projects. Just wondering if you can provide a bit more of an update on the growth CapEx. And I guess, are we still expecting that to $25 million incremental EBITDA margin -- contribution, sorry?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [3]

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Yes, Mitch. Yes, I think I mentioned before a little bit. It's been a project management exercise, we're bringing that equipment in. It's gone really well. I'm proud of the team. I think I've touched on before that we're going to allocate 5 of those trucks over to the West into some iron ore. We don't actually break it out and measure this thing as -- these growth assets as a project going forward. They've been absolutely sort of distributing into our entire fleet now. And that's the way that we trade it. But I get roughly $25 million? I assume so. And would they generate value on the ongoing basis moving forward? Absolutely. So we're really happy with our investment. It's played out really well. Particularly happy with the way that we've brought some of this equipment in and rebuild it for our Force workshops. The team in New South Wales did a particularly good job in project managing that. And the equipment has gone out to work, and this is performing well. So yes, couldn't be happier with the way that's played out.

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Mitchell Sonogan, Macquarie Research - Analyst [4]

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Okay. Great. And then just over in the Western region, I know it's going to be a little bit flat in first half '20, but I see a few projects coming on. I have heard from a few peers, there's been a few tenders sort of slipped a little bit. Can you maybe just give us bit of an insight into what's happening over there for you in the tendering environment? And I guess cost of it in terms of this -- those contracts starting to drop shortly?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [5]

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Yes. I mean when you're relying on tenders to drop in these very complex projects, that's the way it's going to happen. But we've -- of the 100 assets we've spoken about, we've already landed 50 of them, put them to work, which we're really, really happy with. I've spoken to BGC and they've given me permission to talk about our relationship, and the fact that they've won quite a big construction job, and we're looking to provide a large package for them. And we're confident that'll go to work in the first half, Mitch. There's other opportunities as well but I don't want to go into so much detail. But we're very -- quite still aware of these projects and the delays. And we wouldn't come out and talk about our confidence in getting this -- a lot of this gear to work in the first half if we were concerned about those delays.

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Mitchell Sonogan, Macquarie Research - Analyst [6]

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Okay. And on the Eastern region, you noted that the improving Rental rates across some contracts. I guess can you maybe just give a bit more detail about how we should expect that to sort of flow through given your prior 2-, 3-year contract lengths across the entire book over the next couple of years?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [7]

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Yes. Look, I think what you're saying the age of these, we've been -- our business has been a pretty steady momentum build over the last few years. And I think it'll remain consistent with that on the East Coast. You're seeing increases in operating utilization again in the next 12 months. And a lot of our equipment is in work. You're right about that. And there's not a lot of churn on the East Coast, but there are limited opportunities to get rate increases. We price well. We're very disciplined in the way that we allocate equipment and focused on return on capital as our metric. So there is opportunities there. But I think most of the gains will come from increased operating utilization on the East Coast and getting these new projects in on the West Coast.

A lot of the contracts that have come off, Mitch, in the last few months have been projects that sort of historically we've got from some acquisitions, and that being of a relatively low profitability. They've been quite high in revenue, but their costs have been quite (inaudible). So as we wind those out and pass them into our projects. I think it's where you continue to see us improve the performance of the business.

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Mitchell Sonogan, Macquarie Research - Analyst [8]

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Okay. Great. Just a final quick one, maybe for Justine. You talked about expectations for no cash tax for the next couple of years. When we look at the P&L, can you maybe just give us a thought on what we should expect there in the next couple of years as well? You had a $18 million tax benefit in FY '18, no tax expense or benefit FY '19. What does that look like in FY '20 and '21, please?

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Justine Lea, Emeco Holdings Limited - CFO [9]

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When we go through the tax expenses, as you mentioned, we are at a $0 tax expense for FY '19. We still have unrecognized tax losses. So we expect $0 tax as that unwinds, and we recognize those unrecognized tax losses on the balance sheet. And then given there's no cash tax as well in the next few years, we don't expect to pay cash tax until we earn $260 million of profit before tax.

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Operator [10]

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Your next question comes from the line of Alex Karpos from Goldman Sachs.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Just first of all, maintenance looked really strong in this period. More above my expectations. Can you track on, one, how this business is tracking versus your initial expectations when you purchased Force? And two, how big could this business get? And what kind of growth are you looking for in FY '20 and beyond?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [12]

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The maintenance business is something that really excites us. 56% increase in activity FY '18 over FY '19. We measure activities as a combination of internal and external works. We got 7 workshops, and only one of those workshops are working day and night shift. So we do see growth opportunities there. I don't think we need to invest in further workshops. I think we just need to max the use of them. I think increasing the retail works on the East Coast is important to us. It's largely an untapped opportunity for us because the East Coast shops have been predominantly focused on internal works, particularly in the second half as we've bought some equipment in that growth, that those growth assets will book through those workshops. So that's where I see the upside. I see the WA workshops are pretty busy at the moment. But there's upside in Perth and Kalgoorlie, I mean Headland is pretty maxed out at the moment. But the Retail side of things on East Coast is opportunity. I'd like to see a similar increase in growth. We'll get that 50-odd percent. But it's just -- it's building for us.

Probably the biggest thing for us is how we allocate 20% internal and external, and how we optimize that as we increase the capacity of those workshops. The first year, it was 45% retail, and this year it was 40%, as we had more internal come through. That's the trick for us, how do we optimize that moving forward. So -- yes, we're very excited by it. We just need to make sure that we're not rushing this, that we're doing our training correctly. We're bringing the right people in. I'd say that the uptick is a little bit. TRIFR is really focused on making sure it's sustainable, there's quality, and there's real focus on safety and getting the right people in and the right culture that's really important. I would say that's probably a limiting factor on growth of those workshops.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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Got it. And then on margins, another strong result here as well. You've talked before about how proud our people think about the business and utilization. But you think about on the margin front, kind of sharing that profit with customers. Is there room for this to go higher as the market gets a little tighter, as you kind of -- WA picks up a bit. Should we expect margins to continue to trace upward?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [14]

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I don't think there's significant increase in margins, I mean, Alex, I think it's more about volume and it's more about growing the business in the West Coast and getting commodity diversifications. We'll continue -- so while we wait, to continue just on how can we do things differently, how can we do imports more efficiently, how can we add value to our customers. But I don't expect significantly greater margin improvement as we go forward. Particularly, as we build the workshops as well. That's a -- because of the nature of its capital intensity, that's low margins. So that'll come into the mix as that activity increases.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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Got it. And then just one final one for me. If we were having this discussion 6 months ago, there was a bit of a soft patch, it sounded like, in WA with some projects rolling off and timing. Have those major projects roll offs impacts mainly kind of faded. You talked about 1H '20 being flattish then ramping in 2H '20. Is there any other big roll offs we should expect in WA in the next year or so?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [16]

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That happens. You will see the impact of that in first half of '20, as Thao mentioned. And as we get that gear back to work. And then WA, we'll build, and be really sort of back firing in calendar '20, as Thao said.

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Operator [17]

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(Operator Instructions) And your next question today comes from the line of Hamish Murray from Bell Potter.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [18]

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Congratulations on the result. Just a couple from me. I noticed that the average operating utilization chart isn't in the deck this time. So I was just wondering whether you guys could talk on the exit rates around that, and how it exited the period. Because I see it, average 64% across the year. But just average exited the period on both a group level and out of the Eastern region and the Western region?.

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [19]

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Yes. 64% operating utilization across the business FY '19, which was pretty fine in FY '18 -- sorry, up from 58% last year flat half-on-half, I think -- yes, sorry, sorry. And that's impacted by some of the WA projects coming off. We expect that to increase as we get into FY '20.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [20]

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Yes. But I was wondering more in terms of, that obviously the average across the half. But can you give any sort of indication as to how it exited. So how that number looks at 30th of June?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [21]

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At 30th of June it was 64%.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [22]

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All right. Perfect. And then just the slight -- the sort of slight increased just in civil exposure. Is that something that is more opportunistic or something that we can expect to go forward, or -- any comments around that?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [23]

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We're looking at opportunities absolutely. I mean utilization is important for us on -- so it's largely projects with a strong utilization, a heavy amount of earthmoving equipment requirements and a lot of dirt to be shifted is what we're focused on. When those opportunities arise, we're absolutely -- we look at them. There's opportunities arising in New South Wales with the Sydney Airport expansion works, we'll keep a close eye on that. But we treat every project as an opportunity with a real strong focus on return on capital. So our fleet -- the bottom end of our fleet is well suited to large civil jobs.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [24]

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And just a last one. Just back on that EBITDA margin, I take it that some of that uplift and the cost outcomes from the synergies you're getting from the Force acquisition. I was just wondering whether you have any sort of indication. I understand it's a dynamic business and it that depends on average utilization in terms of the leverage you get. But at these sort of levels, is there more increases you can get out of that or is that sort of a sustainable number?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [25]

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I think it's pretty sustainable. So I think that's a pretty good EBITDA margin that we've increased to. Given that we certainly haven't got the right recoveries that are back to those 2011 type, '12 type period. So we've done this through cost management, for efficiencies. And we're very, very happy with that. And as far as the Force workshop. The Force workshop is largely focused on rebuilding our components, rebuilding our equipment. A lot of that work is capital. So it doesn't come quite through on that EBITDA margin. It comes through when getting more bang for our buck from capital numbers. When we do have operating cost associated with our equipment, particularly when it's going from one job to another, we will put them through the workshops and we do get savings from that. But I think our margins are pretty solid. I think it's around the edges, now it's all about sustainability.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [26]

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And just one more quick one just on the margins. I saw that as you guys called out, that the Force workshop's margin just sort of dipped down as tough repairing those and preparing those growth assets. Going into FY '20, can we expect that to slowly kick back towards that sort of 9% to 11% margin rate? Just as they take on less of that rebuild kit?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [27]

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That's very much a function of our allocation between internal and external works. As Thao mentioned, that all the (inaudible) associated with that business go to the Retail works. So the more internal works we do, the slighter the margins will look. If our proportion of works is more Retail, I would expect that to grow. If it remains around the same, but I say, it'll pretty flat or slightly increasing as we get some efficiencies that we're offering this business. There's a hell of a lot of work that we do on the Force business in regard to our reporting, our accountability, our workflows, et cetera. It's a really strong focus for us.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [28]

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Yes. And just -- and sorry, I just want to take back, just one more if I can. Just that 64% number and the 90% growth utilization number that's called out. I assume that's not including the 35 new -- or 35-odd new vehicles that we're expecting to come on in this full year?

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Justine Lea, Emeco Holdings Limited - CFO [29]

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That's correct. It's not included in the FY '19 numbers.

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Operator [30]

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(Operator Instructions) And your next question comes from the line of Marc Rabinov from Lismark.

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Marc Rabinov;Lismark Nominees, [31]

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Congratulations on the very intelligent acquisition in the last 12 months, which is clearly performing as you expected. I just had 2 questions. And I have to emphasize on really looking out on your longer term over the next 12 months. And what I'd like to know is as you have really transformed this business in the last few years, we now have a current asset base. And on the current asset base, would it be reasonable to say that we expect sustaining CapEx to stay at about $90 million per annum going forward? And secondly, as you continue to improve the business, where would you see mid-cycle EBITDA getting through from here? You did $214 million and that's great, but would you be prepared to speculate on the current asset base where that could head to in the next couple of years?

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [32]

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The spike in net debt around sustaining CapEx, firstly, I'd like to speculate on that. I think $90 million is a bit low, I think it's more like $100 million, $110 million net coming to line with depreciation. I think that you can assume for the next couple of years there'll be no major growth CapEx. We did that in FY '19. We're very happy with that investment, but it's for us putting our free cash flow to work to delever over the next couple of years at least. In regard to speculation around the fleet, what it can generate over time, let me just speculate on that one, to be honest. But I think that -- we'll continue to work our equipment harder. I think you'll see improvement particularly as we diversify our commodity mix and get some gear working harder in the West, and what has been over the last 6, 12 months.

And we continue building what we're doing in the East, we'll continue to work hard to provide value to our customers. We'd love to widen our value proposition to include more services, to add more value to our customers. We really like the noncapital intensive earnings we get from our Retail maintenance business. And that indicates to us that there's other tricks that we can do for our customers as well. So that's where we're sitting. I mean return on capital is everything for us, so that is our focus. Ahead of everything, it's return on capital, it's sustainability. It's using the current market conditions to delever, and to evolve this business and to evolve this business into a -- into something that can create value for our customers and our shareholders through the cycles.

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Marc Rabinov;Lismark Nominees, [33]

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Clear. So I know it's difficult, but you do see there being significant room to keep improving EBITDA from where it is now without having to go out and make another acquisition.

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [34]

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I mean for us, yes. Yes, look, there's room to improvement in our fleet. I certainly don't want to go out there and give you a long-term forecast.

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Operator [35]

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(Operator Instructions) I have no further questions at this time, please continue.

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Ian M. Testrow, Emeco Holdings Limited - MD, CEO & Executive Director [36]

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Okay. All right. Again, I would like to thank our employees, partners who are in this business, I greatly appreciate their efforts. As you can tell from the themes coming through here, it's discipline, it's continuous improvement, it's great and it's very customer-focused. And I couldn't be more proud of the team. I'd like to thank our investors, and I'd like to thank everyone for dialing in and your interest in this call.

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Operator [37]

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Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now all disconnect.