Good day. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Emeco Holdings Limited Fiscal Year 2023 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad, and if you would like to withdraw your question, press the pound key. Presentation slides can also be advanced by each user on the right-hand side of the webcast player. Thank you. I will now turn the conference over to Ian Testrow, Managing Director, and CEO. You may begin your conference.
Good morning, welcome to Emeco's results for the 2023 financial year. With me this morning is Theresa Mlikota, our CFO, who commenced a new role in May and has hit the ground running. Getting straight into it, onto slide number three. FY 2023 really was a year of two halves, where we delivered very strong second-half performance after what was, as you're all aware, a difficult and disappointing H1. Off the back of the exceptionally strong demand for our equipment and service, particularly in rental and Force, we delivered record revenue of AUD 875 million, which was up 16% on FY 2022. Operating EBITDA of AUD 250 million is in line with our guidance.
Our second-half operating EBITDA of AUD 137 million was 21% higher than the H1, and we delivered growth across each business unit. We have strong momentum for further growth in FY 2024. The H2 saw the anticipated turnaround in Pit N Portal that we flagged at the half. This is driven by actions we took to de-risk and reset the business and the impact of successful renegotiation of rates and terms with a major customer. I'll leave Theresa to talk in more detail about the credit provisioning in a few minutes, but I want to stress that we've done a huge amount of work on counterparty risk, and we have strengthened our team and processes to ensure we are less exposed going forward.
In this regard, some of you'll be aware that we also terminated another project, Aurora, late in the H2, and the financial impact of that is in this year's numbers. I want to stress that no further provisions have been taken or are required. We have reset the business and put measures in place to ensure that we don't repeat the same mistakes. Second-half operating free cash flows were very strong at AUD 44 million and shows the business's ability to generate strong cash flows moving forward. Our balance sheet remains strong at 1.1 times even after absorbing the credit losses. Our return on capital of 13% is well beneath where it should be. That is driven by Pit N Portal's underperformance. Excluding Pit N Portal, the core business, that is rental and Force, generated a return on capital of 18%.
Our balance sheet and cash flow have allowed us to invest in our business and deliver on, on our capital management policy. The board has declared a H2 capital management package of AUD 13.8 million, which maintains our fully franked dividend at AUD 0.0125 and includes a share buyback of AUD 7.3 million. That's 35% of Operating NPAT, which is the upper end of our policy and demonstrates the board's confidence in the business. On to slide four. Please note the H2 of FY 2023 is a turning point for the business, with Operating EBITDA up 21%, Operating EBIT up 56%, Operating NPAT up 95%, and the cash flow really kicking back after the poor H1. Slide five summarizes the key numbers that I've already talked to.
For me, the main call out is the AUD 44 million operating free cash we generated in the H2. After a tough H1, the business has really delivered a strong performance. On to slide six and our outlook. Our outlook into FY 2024 is positive, with the momentum achieved in the H2 driving earnings growth. Rental growth will be driven by increasing utilizations at the projects we worked hard to establish during the H2 of FY 2023. Force's contracted retail pipeline will underpin earnings growth. Pit N Portal's earnings will be higher in FY 2024 than 2023. However, H1 earnings will be lower than the H2 of FY 2023, as the impact of de-risking flows through. Pit N Portal's earnings will improve in the H2 of FY 2024.
We will focus on cost efficiencies and pricing to drive margins and return in the continuing high inflation environment. We've committed to an ERP upgrade, which is expected to be a three-year project and will improve our financial and operating capability. We expect to spend about AUD 8 million in FY 2024. This will be treated as a non-operating expense. Leverage will remain at our 1x long-term target, supported by our cash generation. Based on current utilization, this year, we will spend approximately AUD 160 million in sustaining CapEx, which is in line with our depreciation. We've spoken at length about our track record of delivering high returns in our rental business through our mid-life asset rebuild model.
This is a real competitive advantage for us as we're able to acquire mid-life asset cores and rebuild them through Force to meet customer demand and facilitate growth. In FY 2024, we will rebuild 5 789C truck cores to replace cross-hired fleet. This investment will be approximately AUD 7 million and generate an IRR of 19%. In addition, we've also found an opportunity to acquire 18 793D truck cores. We're really excited about this as they're very high-demand assets. This will cost about AUD 19 million, and we can rebuild each truck at approximately AUD 1 million each. We'll do this to meet customer demand, which, at the moment, appears very strong. We expect an IRR of approximately 20% on this investment. Turning to slide number seven.
By way of reminder, FY 2023 CapEx included the rebuild of cores acquired back in FY 2022, which were deployed to new and existing projects throughout the year. The total cost of these trucks ended up being 25% of the cost of brand-new trucks and will generate returns of over 20%. This is a great example of our mid-life asset rebuild model being implemented to meet customer demand and achieve strong returns. The new investment of 18 cores I referred to earlier will generate approximately 20% return, and the total cost will be 30% of buying new trucks. The timing of this investment can be managed as we rebuild the truck cores through Force to meet our customers' demand.
We've said that our total spend for this year is expected to be between 24 and $37 million, depending on how many trucks we rebuild in FY 2024. We really like this flexibility, as it enables to manage our capital investment according to market demand. It takes away the lumpiness you see in mining services, where quite often a project wins result in huge capital bill. I think this is a feature of our business that differentiates us from our peers. We'll give you an update on this at the AGM in November. Now, looking at our divisional performance. Slide 9 addresses our safety performance. Safety is our most important priority every day across the entire Emeco business. Our total recordable injury frequency rate is 2.9. Regrettably, we recorded our first lost time injury in over seven years during the H2.
You've heard me describe pride in our safety performance. This is a timely reminder that we can never be complacent, we have to implement ongoing improvements as part of our health, safety, environmental and training program. Turning to slide 10, rental performance. Rental revenue grew 19% in FY 2023 as we deployed fleet to meet strong customer demand and increase the number of fully maintained projects in line with our strategy. We deployed equipment to meet new work at eight project sites through the year. Our gross utilization increased to 93%, driven by this new work. Operating EBITDA grew 8% to AUD 260 million. The H2 performance was strong, with Operating EBITDA of AUD 136 million, up 10% on the H1.
As we called out in the H1, margins were impacted by the increase in fully maintained projects, use of cross-hire fleet to meet customer demand, and the ongoing rising cost of both parts and labor. As mentioned earlier, our rental and Force business is achieving a healthy 18% return on capital. Operating EBIT increased 17% in the H2 to AUD 75 million, and EBIT margins increased to 29%, which is tracking in the right direction. This positive momentum built up in the H2 will continue into FY 2024. We'll also see half-on-half growth, as the H2 is boosted by the deployment of growth assets. Slide 11 shows Eastern Rentals performance. The Eastern region delivered 22% revenue growth and 9% operating EBIT growth for the year as we commenced new fully maintained projects.
H2 earnings growth of 10% is a solid result. Strong demand will continue in FY 2024, we expect the majority of the growth, 793D trucks, to go to work in the Eastern region. Onto slide 12 and the Western Rental. 15% revenue growth and earnings growth of 6% was delivered across the year, with strong demand from iron ore and gold projects. Half-on-half Operating EBITDA increased by 12% as equipment was put to work. Margins improved in the H2 as we recouped pricing on new projects and contractual rise and falls to offset the ongoing inflationary impact on parts and labor. FY 2024 will see growth in earnings. Margins in the West are still lower than the East, and this is predominantly due to the greater proportion of single shift projects in the West.
Interestingly, the West still manages to achieve a healthy 18% return on capital, similar to the returns in the East. We continue to focus on growing our double shift projects in the West and see opportunities to do so in the H2 of 2024. Onto slide 13, Force. Force continued its strong performance during the year, driven by the significant increase in retail activity as well as internal work. Retail revenue increased 73% to AUD 156 million, the operating EBITDA grew 30% to AUD 12 million. Margins stabilized in the H2 as we improved pricing and focused on the productivity and efficiency of our workforce. Force is at the heart of our competitive advantage, with the quality and cost advantage of fleet rebuilds underpinning a mid-life asset model.
We've increased the proportion of Force-built components used in our rental fleet by 30%, which provides us both savings and security of supply in a tight and expensive parts market. We expect earnings growth in FY 2024 from both retail and internal works, weighted to the H2, as is typically the case with the Force business. Growth is underpinned by contracts for 55 retail rebuilds, internal activity will continue to be strong. We expect this will be between 45 and 60 machines, depending on the sequence of activity of the 793D cores in the workshops to meet Eastern region demand. Turning to Slide 14 and Pit N Portal. Year-on-year revenue declined by 10% to $224 million, reflecting the de-risking and reset of the project portfolio that we talked about the H1 result.
The impact of lost revenue, as well as one-off terminations, demobilization, and restructuring expenses, all hit the H1 result, as you're well aware. The H2 saw a turnaround in earnings, with operating EBITDA of AUD 14 million and margin back to 14%, which is driven by new projects and the improvement in the contractual terms with a key customer. I'll leave Theresa to go through the credit provisioning and the cash flow impacts. However, as noted, our risk and credit discipline also saw us terminate activities at Aurora late in the H2. We've really improved our counterparty risk and credit management process to reduce risk exposure. Again, these issues were not performance-related, and we've acted decisively when terminating projects. We've cleaned up and right-sized Pit N Portal and put measures in place to ensure that we don't make the same mistakes moving forward.
We believe it is important for Emeco to have an underground exposure, given the growth and diversification this sector provides the group. We'll continue to evolve Pit N Portal to ensure it delivers adequate returns consistent with the rest of the business. Over to you, Theresa.
Thank you, Ian, and good morning, everyone. A quick point to note before I start, is that the presentation refers to operating results, which are reconciled to statutory results in the appendices to the presentation. Ian described FY23 as a story of two halves, and you can see how this has flowed through the P&L on slide 16. Full year revenue growth of 16% was driven by the exceptionally strong H1, with growth continuing in the H2, delivering record revenue for the year overall. H2 growth was tempered by the decline in PnP revenue, whilst both rental and FORCE continued to deliver good revenue growth. You can see the significant growth in operating EBITDA and EBIT and a strong margin recovery in the H2, with a 21% increase in operating EBITDA and a 56% increase in operating EBIT.
Depreciation stayed relatively stable across each half. This supported higher EBIT margins as the business continued to grow its less capital-intensive earnings through FORCE, PnP, and fully maintained projects. Depreciation for the full year increased from AUD 130 million to AUD 146 million, largely in line with revenue growth. Costs continued to challenge the business with repairs and maintenance expense, as a percentage of revenue increasing from 16% in FY22 to 17% in FY23, due to parts and labor cost inflation. The increased use of cross-hired fleet and subcontracted labor also impacted margins as the business met rising demand in the rental business. As Ian noted, part of our capital spend this year is to replace cross-hired fleet with our own equipment, which will improve margins and returns.
Higher levels of Force Equipment workshop rebuild revenue diluted margins, positively contributed to return on capital. Finance charges also increased as a result of higher lease liabilities, as well as higher interest costs on debt and supply chain finance drawn through the year. Corporate costs increased in line with revenue growth and the increased capability being added to the group. Operating NPAT of AUD 59 million is down 14% for the year. However, you can see the material turnaround in the H2 with a more than doubling of NPAT half on half. Return on capital was lower at 13%. This was driven by the poor performance of PnP. Excluding PnP, return on capital is 18%, which is well above our cost of capital. The graph on slide 17 shows the FY23 cash flow waterfall.
Cash conversion of 103% is based on statutory EBITDA conversion to cash flow from operations. The outflow and working capital of AUD 18.2 million relates to the non-recovery of AUD 23 million in PnP receivables that are now fully written off. Finance costs of AUD 26 million are higher than the prior year as a result of higher leasing levels, higher average debt drawn, and higher interest rates on the RCF. Cash was also paid for establishment costs on the RCF rollover. No tax was paid in the period as the group has carryforward tax losses, which were used to offset tax payable. The company has AUD 312 million in carry forward tax losses after this year's offset. Sustaining CapEx of AUD 154 million was funded from operating cash flow.
This resulted in operating free cash flow of AUD 52 million for the year, of which AUD 44 million was generated in the H2. Cash outflows for dividends and buybacks totaled AUD 20 million. Debt and lease repayments totaled AUD 19 million. Slide 18 is a new slide. This summarizes how we spent our capital during the year. The bulk of our net sustaining CapEx of AUD 154 million has been spent in the core rental business. Sustaining CapEx was 106% of depreciation versus 119% last year. As Ian noted in the outlook slide, sustaining CapEx for FY24 will be in line with depreciation at approximately AUD 160 million.
Ian has talked through the AUD 22 million in growth CapEx invested this year, and the returns that we expect to generate on core rebuilds using FORCE, which is both capital and cost efficient. We are confident that the capital we spend on growth will generate returns of around 20%. Moving to slide 19. Our balance sheet remains strong, with net leverage of 1.1 times EBITDA. You can see the increase in plant and equipment reflecting sustaining and growth CapEx. Receivables have increased as revenue has grown, partially offset by recoveries and write-offs. You will note that our revolving debt facility is undrawn at year-end. Our AUD 250 million medium-term notes have been established at an attractive fixed 6.25% interest rate and are non-current, being due in July 2026.
We have available liquidity of AUD 142 million, including cash of AUD 47 million. This is summarized on slide 20. During the H2, Fitch increased our rating by a notch to BB-, and Moody's also upgraded their outlook to positive on their B1 rating. Slide 21. We presented extensively in our half-year reporting about the one-off expected credit loss provision that was raised for AUD 23 million in relation to the Minjar Barto receivable. Since that time, we have collected AUD 10.9 million against this, including AUD 6.4 million recovered post-balance date. The balance of that receivable is now fully written off. However, in the H2, we took action to secure and enforce our position at Aurora, where we were owed almost AUD 10 million, by placing that company into voluntary administration.
The entity was subsequently placed into receivership by a secured creditor, where we have also written that amount off. The KMP contract was also terminated as part of the overall de-risking and resetting of the PnP customer Portfolio, and that debtor has been written off. The net impact is that the provision taken during the H1 of AUD 23 million was sufficient to cover all other written-off amounts. However, that same amount will not be collected as cash. As outlined in the H1 result, there have been measures implemented to strengthen risk and credit management and to improve credit processes and customer selection. With the introduction of myself and our Deputy CFO, Jeetendra Bhudia, and the addition of a dedicated credit manager, a comprehensive counterparty credit risk review has been completed, and we've set out our current receivables book on this slide.
Our top 10 customers represent 64% of total revenue, and 84% of debtors are considered blue chip or fully insured. It is the 16% that we are working with that are not insured or are underinsured. These accounts are actively managed to minimize the risk of any material credit default in the future. With that, I will hand it over to Ian.
Thanks, Teresa. Now on to slide 23. I'm sure you're all familiar with our strategy, so I'll not dwell on it, other to say than that we are fully aligned to each of the pillars that support Emeco to build a sustainable and resilient business that generates value for our shareholders. FY 2023 has had its difficulties as we've de-risked Pit N Portal, the actions we have taken have been necessary to reset the return profile of the business, as well as enhance the credit quality of our customer base. Our value proposition continues to resonate with customers with increasing work at force, more fully maintained rental projects, and growing EOS technology adoption. As Teresa has said, our balance sheet is strong. We'll generate strong cash to support capital management and our growth initiatives. Moving on to slide 24 and sustainability.
Emeco strives to create a sustainable business, which continues to deliver creative solutions for our customers, a family feel for our people, support for our local communities, and value for our investors. We've made good progress with the board supporting and approving the ESG strategy in February, and with the establishment of the ESG Committee in March to discuss, shape, and measure initiatives to assist in establishing systems to report on the progress and compliance with TCFD. We're investing in our EOS technology to support our fleet to be as efficient as possible and to manage and reduce emissions. We've also started work on developing our current Scope 1 and Scope 2 emissions. We also formed a Reconciliation Action Plan, which is currently under review. Now, lastly, on the slide 25, we'll summarize our operational priorities for FY 2024.
Our primary objective remains to drive the performance of our core rental and Force business as we continue to navigate through the current environment of strong demand for our fleet and services while managing ongoing inflationary pressures. Paramount is driving the advantage of our mid-life asset model to deliver strong returns on any growth investment. We'll continue to build on the reset of Pit N Portal in order to achieve acceptable returns. We think there's significant opportunity to drive EOS further after securing four major projects this year, and especially with our carbon module, which allows customers to monitor and manage emissions data in real time. With that, I'll hand over for questions.
If you would like to ask a question, please press star followed by one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Jakob Cakarnis from Jarden. Please go ahead. Your line is open.
Morning, Ian. Morning, Theresa. just wanted to get some commentary from you, please, for the trajectory for EBIT margins, sorry, EBITDA margins for the rental business. Can you just talk to some of the cost pressures that you've faced, H1, H2, and just how those are looking as you head into 2024, please?
Thank you, Jakob. Ian here. We've mentioned it's an Inflationary market, and we have seen increases in parts, particularly over the last 19 months. That eased a little bit in the last half, but, you know, labor's definitely tight. As we've ramped up a bunch of rental projects, we have to use more subbies than we have done in the past, and so there's been a bit of cost pressure from that. We see opportunities to replace those subbies with our employees, which is our model, and that will reduce costs. The other opportunity to reduce cost is through this cross-hire with of other people's Equipment.
For the demand that we're seeing in our rental business at the moment, we've had to rent some other equipment off others, because the customer just wants to deal with us. Our utilization is strong, and as you've seen from our from our leases, we're bringing in some additional equipment. That equipment will be used initially to replace cross-hires, which should improve our margins. You know, in an Inflationary environment, with our rising floors in place, with opportunities to replace when we put new gear out to work, I feel pretty good about at least on the margins moving forward in our Rental Business.
Yeah. Thanks, Ian. Is it fair to characterize it then that maybe the H2 of 2023 could be a, a trough in EBITDA margins, then, for the rental business?
Yeah, I think so. I, I believe so, yeah.
Okay, thanks for that. Then, you've said that you're going to deploy those new truck cores within the Eastern Division. Is there any issue that we need to think about for utilization rates within that as those new Cores come into work, or is it very much additive to meet the demand that you guys have?
It's additive to meet demand. The 793Ds are absolutely prime trucks that are in demand from our customers. If you look at the 789s, 793s that we're investing in growth, that's absolutely full utilization for us. We're actually importing those cores from overseas. They'll arrive around the end of the H1, and then we'll rebuild them in the H2. I mentioned that we expect to get a 19%-20% return on 789s and 793s. I think any uptick from that that growth fleet will be seen in the back end of the H2. We're really excited about it. We're communicating well with our customers. We expect them to go to work.
789s are initially placed across our equipment. This is absolutely core business for us, Jakob, as evidenced by the cores we picked up from the BHP auction a couple of years ago and successfully rebuilt and put out work. Customer acceptance is strong, and our returns are strong, so yeah, we're really excited about them.
Thanks, guys. Appreciate the comments.
If you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Nicholas Winton from Jefferies. Please go ahead. Your line is open. Nicholas, please go ahead.
Hi, hi, Ian. Thanks for taking my question. You called out the H2 skew in Pit N Portal and Force Equipment. How should we think about the overall skew of group earnings for FY 2024? Sorry, if that's been asked already, I dropped out just before.
Yeah. Look, we'll see growth half on half in our business, but we will see a slight drop-off in Pit N Portal as the de-risking come through the business, and there's a bit of seasonality in force, and typically the H1 of it's softer. I reckon you can consider the H1 relatively flat, half on half, and some correction to the H2.
Yeah. H1, relatively flat on the H2, 2023. Okay.
Yeah.
Yeah, sorry again, if this has already been asked, but obviously you haven't given any sort of Quantitative Quidance. I remember last, last result, you sort of gave us an indication that you were happy with consensus, even direct expectations. Are, are you willing to, to say the same this time around?
Yeah, I am. Yeah, I am. I'm comfortable with it.
Okay, great. That, that's it for... Oh, maybe just the last one, actually. That, that top 10 customers as a % of Revenue on, on slide 21, that's for the whole group?
Correct.
Okay. That, that's it from me. Thanks, guys.
Thank you.
Your next question comes from the line of Cameron Bell from Canaccord. Please go ahead. Your line is open.
Thanks very much. Morning, guys. The 793Ds, did you have an opportunity to buy more of them?
That's a lot of them, mate. 18, 19 in this market, 18 trucks, 793Ds. You secured them from a, from South Africa, actually. Actually, Cameron, they're pretty tough to get at the moment. I think it shows another core capability about being able to acquire these, these cores through our connections around the world. Look, if we could have got more of them, we would. I think our connections in Africa are pretty strong. I think that this business model of ours, of being able to buy these cores, bring them into the country, cost effectively, rebuild them, like we're a Caterpillar Dealer ourself, and put them out to meet customer demand, really differentiates us. It's as, as I mentioned before, it's something that, that really excites me. We've got...
You know, we've spoken to our customers. We have those relationships with our customers, where, you know, we can work on them with the timing, timing, and rebuild them. Yeah, it's something that absolutely Core business and would generate strong returns and growth for us moving forward.
Yep. No, I, I, agree. How many of the rebuilds do you think will happen in FY 24?
Yeah, I, I reckon that we'll do those, they indicated the 89s. We'll do them as a priority, because we'll try and knock over some cross-hired fleet that we're renting from others. If we bring in the 18, I reckon, you know, we roughly bank on about half of them, mate. Is what I'm kind of thinking. You know, that'll be in, in the H2, and then that'll project through into FY 2025. I can update the market on how we're going at the AGM. That's a bit of a rough guide at the moment. You know, it's more about timing, getting them through Force Equipment, landing them in the country, and that sort of thing. You know, demand, if we can place them all and put them through, we'll, we'll place them all.
I think the absolute strength of the business with this model is that, you know, we can time our cash flows and our rebuild costs and our investment according to when market demand and not hold up, you know, a hell of a lot of capital in these cores as we're running through that process.
Yeah. Okay. Then kind of just fleshing out the answer you gave earlier and what you're saying then, could you maybe flesh out the Potential Cost Savings from replacing your hire expenses with rebuilt kit?
Hi, you, you mean our cross-h ire?
Yeah. Yeah.
Yeah. Yeah. I don't have that number on, on me right now. You know, I, I reckon, like, if I was gonna say, what is this total Investment in Growth CapEx going to get to us? Right? You know, if you, if you look at the total amount, 793s and 789s, it's still about 44, I reckon that'll give us about, you know, on a ongoing annualized basis, about 20 a car. I, I reckon we'll probably get maybe five of them in FY 2024 towards the back end as we replace that gear and the timing goes in. That's kinda how I see it, at a bit of a back of the Envelope Type Analysis.
Yeah. Okay. No, that's appreciated. Thanks, guys.
We have no further questions in the queue at this time. I'll turn the call back over to the presenters.
Thank you very much for the interest, for the employees dialing in. Appreciate you guys. Really appreciate your work, and thank you very much.
Thank you.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.