I would now like to hand the conference over to Mr. Ian Testrow, Managing Director and Chief Executive Officer. Please go ahead.
Thank you very much. Good morning to everyone, thanks for joining Emeco's results call. I'm joined by our Chief Financial Officer, Thao Pham. You'll see from the announcement released this morning that after 12 years and a massive amount of work across finance, strategy, M&A, risk and legal, Thao advised me that she's looking to retire from the business. I understand she's gonna be a heap of trouble. I have to say, while disappointing to see Thao go, she departs with the very best wishes of the entire board. Thao's worked tirelessly side by side with me and the board over the years as we've restructured and refinanced the business. Absolutely to highlight the refi in 2021, which replaced our expensive U.S. high-yield bonds with Australian bonds at a great rate, locking up 2026, crucially important for the business.
Also, Thao's been absolutely pivotal in working closely with us as we've transformed this business from being a pretty vanilla rental business into a business that's has gone underground, retail maintenance, much more value-adding rental as we acquire services. If you look at the revenue for when we first started on this journey about seven years ago of about AUD 200 million a year up to forecast around AUD 900 million a year now. It really shows the transformation we've made to the business. An absolute pleasure working with you, mate. Look forward to it for the next few months. I'm also really pleased to announce we've secured the services of Theresa Mlikota as the Chief Financial Officer, moving forward.
Theresa will commence with us on 8th of May. She brings a wealth of experience in the resources and contracting mining services. Really, really excited about working with Theresa and looking forward to it. Theresa's most recently the Chief Financial Officer at Adbri. She was previously a Chief Financial Officer at Ausdrill, now Perenti, Macmahon and Farmico. Bit of a who's who in the mining service as well. She's had also senior leadership roles across the energy and mining sectors. Really looking forward to working with Theresa. Brings us heaps and heaps of horsepower. Thao will be staying on to ensure a seamless transition. I'm sure you'll all join me in wishing Thao the best for her next adventure. Now on to FY 2023 half year results. On slide two, I'll quickly run you through the key numbers.
You can see that we've again delivered strong revenue growth across the business, which reflects our market position and strong demand from our customers for our services. As we flagged back in October and at the AGM in November, this half has been hit with the operational and financial impact of a payment default by a long-term Pit N Portal customer. This has led us to take decisive action to cease activities at each project and to exercise our right to terminate contracts. This meant that we demobilized our equipment and people from two underground projects and two open-cut projects.
We do not believe there is a systemic credit risk in Pit N Portal, we took this opportunity to review the portfolio with a focus on contract governance and to ensure that we reduced our exposure to customers, where their payment performance was not at the high level we expect from our counterparties across the group. As a result, we terminated an additional open-cut project. Thao will provide you a more detailed update where we're at with that in a minute, including the details of us taking provision against AUD 22.9 million in the statutory accounts. As you'd expect, we're working very hard to recover the funds, and we have another payment scheduled to be received this week.
As you can see, the loss of revenue earnings from the terminated projects as well as the termination, demobilization, and restructuring costs we incurred in expense, had a real impact on our EBITDA, EBIT, NPAT, and our free cash flow in the first half of FY 2023. We've also had to manage through the massive East Coast weather events that have also had an impact on our results. The board has maintained its capital management policy, maintaining the AUD 0.0125 fully franked dividend. This equates to 34% of operating NPAT, which remains at the top end of our capital management payout range. The board has also refreshed the 10% buyback that we put in place last year, which allows us to recommence buying back stock. Just turning to slide three. I'd like to highlight the following.
Briefly, the data is at the upper end of our guidance as provided at the AGM in November. Eastern region rental has achieved strong revenue growth, but earnings have been held back by extreme weather events. The business is well placed for utilization and earnings growth moving forward. Western region rental has also achieved strong revenue growth. Earnings have been held back by the terminated Pit N Portal open-cut projects, where the Western region were renting into Pit N Portal. The Western region team have done a great job finding new projects for this equipment. You'll see an earnings growth coming forward in the second half. Pit N Portal was impacted by one-off termination and restructuring costs as a result of us terminating projects.
On a really positive note, the team has done a fantastic job restructuring the Mincor contract to create a win-win for both parties and this long-standing project with Mincor that will absolutely provide our base load earnings to grow the business moving forward. Really proud of that. Our balance sheet remains strong, and Tal did a great job extending the RCF to December 2025 with the 2-year extension option. Yesterday, Fitch Ratings acknowledged the strength of the business for a credit rating upgrade to BB-. Our return on capital remains solid at 18% across our rental business. However, the full impact of PMP issues is temporarily to 18%.
You can see from our commodity diversification on this side, that remains a key focus and a key factor with the resilience of this business. On to slide number four. We are reaffirming our operating EBITDA guidance to the range of AUD 245 million-AUD 260 million EBITDA, which implies a strong rebound in operating and financial performance in the second half of FY23. We expect strong growth across the board operating fleet. Our fleet is well positioned in both the east and the west. In the east, we expect the utilization will continue to build as we commence two fully maintained EOS pro-new projects. In the west, we have several projects commencing that will provide earnings growth.
Pit N Portal will rebound strongly in the second half through the restructured Mincor contract, plus the contribution from the redeployment of assets, plus the fact that we don't expect the repeat of a significant one-off cost incurred in the first half. Force continues to be a powerful business for the group. It's central to our mid-life asset model. Demand for our services continues to build. In particular, we're seeing strong opportunities come through for retail work in the eastern region, building on relationships with our existing rental customers. We expect cash and returns will improve in line with the earnings recovery. We're gonna move on to slide five. We've updated our strategy slide. I just wanted to talk you through it.
We have an unrelenting drive to build resilience and profit strong returns in this business. The three pillars of our strategy are fit, create, and sustain. Fit is about the competitive advantage and competitive cost advantage and quality advantage we create for the Force business. Whether it be underground or open cut equipment, we buy cores and we rebuild them through Force, put them out to work. With great quality and reliability build an absolute cost advantage from a life cycle perspective versus what our competitors do. That's how important Force is for us. Create is where we take that competitive advantage and work closely with our customers to see how we can apply it to their project to increase their project profitability, increase the economic life of their project, really contribute and form partnering relationships with our customers.
We do that through understanding how to best use our equipment, our EOS technology, our use of our maintenance services in Pit N Portal's situation in regards to the use of their operators and their expertise and their engineering. That's really important for us to take our equipment, strategic cost advantage, apply it into project, layer our services on top to create value. That's the heart and soul of our business. It really is around that excellence and competitive advantage we create for our ability to acquire cores and rebuild the cores, put them to work with our customers. Sustain is a part of the business where, you know, it's around our operational commercial discipline. It's around our diversification. It's around our capital structure and optimizing the allocation of our resources.
The situation with Pit N Portal in the first half has highlighted that we need to continually build and improve the robustness of our systems and processes around risk management, which is absolute key focus. On to slide seven, with safety. Safety is and always be our first priority. We remain LTI-free for 7 years now. We continue to invest in people, training, capabilities, systems and processes to ensure we continually improve our safety performance. Absolute first priority, number one priority for us. I'm proud of the way the team keeps improving and looking to build our robustness in this area. On to slide eight, people and culture.
I mentioned when I was talking about Thao earlier that the last seven years, our revenue's gone from AUD 200 million a year to AUD 900 million a year forecast this year. That's for our people, and the service that we provide increases our value add. People are absolutely the most important thing in our business. Everyone knows Australia is a tough market for people at the moment. Recruiting, training, retaining, people is absolutely imperative to us. We invest a lot in it. Our Project Align was very successful, and we keep building on that. It's something we're very proud of and something that we focus very hard on. We got some feedback from people when we did Project Align that would like us to seek to contribute more to the local communities in which we work.
We've done that. It's been great fun and really satisfying, and our people have really noticed. Thanks to the team on the work in people and culture. It's been really great. Moving on to slide nine and ESG. During the half, we completed our ESG materiality assessment with the help of KPMG. Thanks, guys. Which has been signed off by the board as our new inaugural strategy. John Worsfold has taken up the leadership of this important work. Thanks, John. We're now in the design and implementation phase. I'll now hand over to Thao to talk through the financials.
Thanks, Ian. Turning to slide 11, which essentially summarizes the information presented in the earlier slides, you can see the first half comparisons. We've done it against the second half of FY 2022 in the prior six-month period, also the prior corresponding period. We think this gives you a feel of how the business is performing. As Ian mentioned, revenue has continued to grow across all segments, reflecting strong demand for our equipment and services. Operating EBITDA came in at AUD 113.5 million, which is at the top end of the guidance range we released at the AGM of AUD 109 million-AUD 113 million. As Ian said, Pit N Portal's performance has impacted the group's half, and you can see this flow down through the PNL.
Operating EBITDA and margin is reflective, obviously, of the Pit N Portal project terminations and the one-off costs we absorbed in the first half, and then the ongoing inflationary pressures across the business and the impact of the continued extreme wet weather in the east, which is well understood. Pleasingly, though, we have increased the level of services that we provide to our customers across the rental, Pit N Portal, and Force business units. Work in our fully maintained projects, as well as cross-hires, which is where we rent assets from third parties and on-hire to our customers to provide our whole fleet solution, naturally comes at a lower margin. It still generates strong returns for us and is part of our strategic plan to build long-term customer partnerships. This helps create value and embed us in our customers' operations, driving contract tenure.
Operating EBIT reflects the new AASB leasing standards, which is driving depreciation this half. Essentially, we have renewed a number of property leases for our Force workshops in the half, as well as our head office lease. We also lease commercial light vehicles, particularly in the Pit N Portal business, so that's coming through the depreciation line. Our return on capital being the last 12 months EBIT over the average capital employed is about 13%. However, the group ROC, excluding Pit N Portal, so essentially the Emeco Rental and Force business, delivered a return of 18%, which is well above our cost of capital. In slide 12, we deal with the outstanding receivable that we drew the market's attention to in mid-October and where we gave an update at the AGM in November.
As Ian mentioned, this was a long-term Pit N Portal customer we were doing work for when we acquired this business in 2020. I just wanna reiterate that there's no dispute as to the services provided or the amount that they owe us. We have made some progress on collecting this, collecting from this customer since we last updated the market in November. We received a part payment in late December, and we're expecting another part payment in this upcoming week. The matter is still subject to further action, and our recovery efforts are ongoing. However, the recent payments have given us a little bit more confidence of recoverability. At 31 December, the uncertainty has been reflected in our accounts by way of the expected credit loss charge to accounts receivable and the impact on the PNL is reflected at a statutory level.
Slide 13 provides a reconciliation of the operating financial results to statutory results, where you can see this impact of the AUD 22.9 million specific Expected Credit Loss allowance, which the board has prudently raised for the outstanding receivable. The AUD 22.9 million essentially assumes payment this week and is the balance of the outstanding receivable. Aside from ceasing operations and demobilizing our fleet and people from the 4 project sites we had for this customer, 2 underground and 2 open cut, we also took the opportunity to review our contracts and counterparties, and as Ian Testrow referred to, decided to terminate an additional open-cut project where we considered the counterparty risk was outside our desired levels. The Pit N Portal and Western region rental businesses have incurred and absorbed some one-off costs this half as a result. Jumping to slide 14 in cash flows.
You can see the impact of the outstanding receivables claim in the working capital build and also increased finance costs with some interest incurred as we drew on our revolving credit facility to provide a liquidity buffer during the half. Our component rebuild and asset replacement expenditure was roughly AUD 60 million for the half. We continue to remain disciplined with our spend, and we will continue to manage CapEx tightly. We have reiterated our full-year sustaining CapEx guidance of AUD 155 million-AUD 160 million. In the half, we also invested a further AUD 4 million in component inventory as part of our supply chain risk management strategy.
Recall last year that we invested $6 million in securing some good value truck cores, this half we have invested a further $9 million in rebuilding nine of these to meet the demand we see in the business. This was done through our Force workshops, our plan is to rebuild the remaining nine cores in the second half. Our balance sheet on slide 15 shows that our net leverage is only slightly above our long-term target of 1 times, notwithstanding the Pit N Portal receivables issue, we expect this to come back down as earnings grows and working capital normalizes back to previous levels in the second half and beyond. We also successfully refinanced our revolving credit facility towards the end of the half with our existing lenders.
We've refreshed a new 3-year term with a 2-year extension option at our election. As you know, our notes are not due until 2027. Pleasingly, despite the receivables issue, Fitch has upgraded our rating one notch to BB-, which reflects our improving financial strength and resilience. This is even after taking into account the receivables. Moody's also recently upgraded our rating outlook to positive. I'll now hand back to Ian to go through some more detail on the segmental performance.
Thank you, Tara. Just moving on to slide 17 in rental. I'll just go through these slides quickly. I've touched on most of them in the earlier part of the presentation.
Of the presentation. As you can see, strong revenue growth has come through in rental. Demand for our services is strong. We've got some good rate increases through where we place new equipment to work and through our rate of pull mechanisms. I'm proud of the way the team have taking advantage of the tight equipment market. You'll see that earnings is pretty flat in rental for the first half. That was predominantly due to wet weather in the east and the demobilization of the Pit N Portal projects and one-off costs in the west. Moving forward, we pretty excited about the business. I was saying to James that I've seen as much activity in the half in regards to both East and West starting up new projects.
Very exciting. New EOS projects as well, and fully maintained projects. Right to map bang our strategy are the projects that our team created. Feeling really good about that and proud. You can see the margins come off a bit, a little bit with inflation and also just the impact of the wet weather and the Pit N Portal one-off costs of rental coming off from Pit N Portal in the West. I think you'll see a bit of a recovery from those EBITDA margins as utilization increases. We certainly see earnings growth coming through in the second half.
As Tal mentioned, our margins will be a touch lower than historical highs simply because we're providing more services to our customers, and we see that as absolute, right in the middle of our strategy in regards to differentiating our service from our competitors. A tough labor market, particularly for skilled maintenance people in Australia at the moment, and our ability to provide equipment solutions to provide fully maintained. Even when we don't have the fleet, our customers are asking us to procure some pieces that are not part of our core fleet and to manage them and provide maintenance as well. That's just layering and layering those services on to create value in those long-term partnership agreements.
it just can be a touch lower on the EBITDA margin, but it's all about return on asset, return on capital for us. We're feeling really good about the Apple rental business. If we turn to page 18, specifically the rental eastern region. As I mentioned, the earnings are pretty flat because of the impact from the excessive weather and flooding on the East Coast. Hopefully, we've seen the last of that and can move forward. Business has done particularly well in creating some new projects in the East. Tal mentioned that we've rebuilt some trucks from some cores that we purchased about 12 months ago. it's great to actually see the model work in regard to, you know, we buy these cores for very little, we hold them.
You see demand build, we put them through ports. We get a great product come out the other end, we put them into projects to create value for our customers and get growth for us and stronger returns. Great example of how our model works, I'm proud of the way the team in the Eastern region are building the business and embracing the strategy. To page 19, the rental in the Western region. Team managed crew, pulling the plug on some Pit N Portal projects that they were renting equipment into. They managed it particularly well, and they've done a great job in finding new work for that gear. The second half of 2023 for the Western region, we're placing a lot of gear into new projects.
Very, very differentiated in the West by the provision of maintenance services and skilled maintenance people. Particularly tight labor market in the West and our team's ability to provide that full service is really, really important. You'll see the growth come through in the, in the Western region in the second half. Along with continue to build on our EOS technology and the data proposition. Yeah, feeling good about the Western rental business. Just moving on to slide number 20, which about Pit N Portal, which Tal and I have already spoken at some length. Whilst we're disappointed and frustrated by the underperformance of payment issues, we haven't faced this crisis. We've taken decisive and corrective steps to terminate contracts.
In addition, we've not taken lightly given the significant costs and dislocations we've had on our people and our financial performance in the half. We've also renegotiated On a really positive note, we've renegotiated the Mincor contract. It's our major project. It's the base earnings that will be growth in this business going forward. I'm really proud of the team, both the Mincor team and the Pit N Portal team, the way that they've sat together and renegotiated this contract. It's obviously crucial for both organizations. I think that they've structured a contract which gives us the ability to achieve the returns that we need to, and, and create value for Mincor as well.
I think that's a real basis, giving us plenty of tenure left in that project for building a long-term partnering relationship. I'm really proud of both teams on that one and excited by it. We expect considerable growth in Pit N Portal gains in the second half that recovers from the first half. You know, there's the one-off cost. There's been the year that we recovered from the projects that we terminated, putting them to new work, and also the restructuring of the Mincor project. I'm very confident we'll get a very strong second half rebound on Pit N Portal business. Jim Gough commenced in January as the new Chief Executive Officer of Pit N Portal. Jim, you know, assumes control of the business with the rebase complete.
Jim's got some fantastic skills and experience in underground mining, he brings a real strong operational performance to the business. He'll improve operational performance, commerciality, contract governance, I'm really feeling good about Jim in the business and the growth in Pit N Portal that will follow. You know, Pit N Portal is absolutely a key part of our business. I love the diversification of open cuts and underground. You know, there's customers that we provide both those services to. It's a really important pillar of our business for growth and commodity diversification. Welcome, Jim, I look forward to kicking plenty goals. Turning to slide 21 on the FORCE workshops.
It's been a really busy half for FORCE, as you can see. New retail business has been secured. Internal activity has been solid, including the new truck rebuilds, which I keep saying, it's such an important part of our business, that strategic cost advantage FORCE creates us for underground and open cuts equipment. As you can see, the margin has declined, which is driven around to the mix of businesses, mainly due to works having a larger proportion of parts which attracts a lower margin compared to more labor-intensive works where we make a greater margin. I'm always enthusiastic when I talk about FORCE. It's the centerpiece of our mid-life asset model. We're driven to be the lowest cost and highest quality provider of equipment. As I mentioned, those, an example of those truck four refills being through FORCE.
In our Western Eastern region, creating new projects and bringing them to work. Fantastic. You know, as Jim builds on this Pit N Portal business, we've seen exactly the same model go through there. We'll buy underground cores, rebuild them through FORCE and put them out to work. It's really important for us. Seeing some really good opportunities to grow FORCE in the eastern region off the back of our existing rental customers. Lots of good work going on there. Conclusion and wrap up. As I said at the beginning of this call, InterGroup Mining has since faced some challenges in the half, and I'm pleased the way we've responded proactively and decisively. We position our fleet and services across a diverse customer base, and we're set for good growth.
Did not waste the crisis with Pit N Portal. We've rebased and restructured, and we're all set up for growth moving forward. Very proud of the way we renegotiated with Mincor and a way to build some partnership into the future. I'll now hand back to the operator for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speaker phone, please pick up the handset to ask a question. Please limit your questions to two per person. If you wish to ask further questions, please rejoin the queue. Your first question comes from Jakob Cakarnis with Jarden Australia. Please go ahead.
Morning, Ian. Morning, Tao. Just wondering if you can give us a sense, please, I didn't see on the materials about some of those costs or dislocations associated with the contract exits in Pit N Portal in the first half, please?
Hey, Jakob, how's it going?
Morning, Thao.
The costs associated with terminating the project, the two bulk costs was termination of employees for some of the Pit N Portal employees that couldn't be redeployed. Some redundancy costs there. I think historically we take them below the operating EBITDA line, but this half we just decided to absorb it all in the Pit N Portal operating number. Demobilizing equipment as well for the cost to bring it back.
Both in Pit N Portal.
Yeah, correct. Both in Pit N Portal in the western region, back to either workshop or the next project. Usually when you have assets coming off, you just spend a little bit of money to prep the assets for each, the next project as well. They're probably the key, three key areas. There was also probably a little bit of cost around general restructuring of the Pit N Portal business. Obviously losing five projects, there were some kind of restructures and redundancies there, which we also took to the operating EBITDA line.
Okay, guys. Yeah, interesting that that was taken above the line. Ian, just one final one from me. Just for the rental business, if you talk about maybe the cadence for EBITDA margins into the second half for the rental business, should we expect that they're above that first half level and kinda getting towards where you've been, like you're saying on strategy midterm?
Yeah. I expect margins in the rental business to recover both in East and West.
Thanks, guys.
Thank you.
The next question comes from Nicholas Rawlinson with Jefferies. Please go ahead.
Hi, Ian and Tao. Thanks for taking my questions. Maybe one for you, Tao, just on the receivable. Could you just confirm how much you've actually received now and what you're expecting to receive imminently?
I will say that at the moment, before we receive the payment, which we're expecting this week.
Mm-hmm.
It's AUD 31 million, and we are expecting to receive AUD 6 this week. It brings the outstanding balance to AUD 25, but the amount of the allowance is AUD 22.9 because you take out the GSC component.
Okay. Great. Thanks for that. Given the previous part payments, what level of confidence do you have in receiving the outstanding amount or at least part thereof?
I'm confident we'll get a chunk of it.
Okay. Just lastly from me. In your guidance, you mentioned revenue growth in all segments in the second half. Sorry, you mentioned growth in all segments in the second half. Is that half on half or year on year?
Half on half.
Okay. Great. That's it from me. Thanks, guys.
Thanks, Nicholas.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from Tony Grogan, Private Investor.
Good day. I hate to sort of labor the Pit N Portal receivable issue, but just wondering how far back it goes. Has this customer been a, you know, a bad, slow payer for quite a while and, you know, have the auditors picked that up and highlighted it, you know, in previous months, previous audits?
Might have Carl just address the question.
Around the audit, this was not previously raised as part of the audit as a concern. There's a history in terms of trading with this particular customer. There's a history in terms of payment. I think it's fair to say, given it's a long-term Pit N Portal customer, the history has been that they have been regularly either late or early payers. It's probably fair to say we did think that the money was coming throughout the months leading up to our announcement in October. A bit of color is that they are...
Pit N Portal have been dealing with these guys since 2017. They are a state-owned entity, they're owned by-
China.
China. China government.
Yeah.
The money's always come from China. It's become later, it's come early, but it's always come through. Unfortunately, something changed when it got us out. What we found out digging is that the governor of the province that owned the company got chucked in jail. We've been told about. The new governor came in and said, "Shit, I don't wanna touch that," and basically froze it. We weren't told about that. We didn't know about that. We were assured that the money's coming in. As soon as we, you know, got the idea that it wasn't, we pulled up the operations at considerable cost as you can see coming through. Yeah, it's an interesting one for us. The company's been told to sell the assets.
We're working really hard to position ourselves to get money on the way through and also when they do finally sell those assets to recapture as much as we can. Basically a shit situation.
Yeah.
We're working really hard to rectify. As we mentioned, we haven't wasted it as an opportunity to reset that business.
Yeah. Well, thanks for that. Yeah, no, I just wondered if they were consistently bad, but clearly something's just happened recently and caught everyone by surprise. No, thanks for that.
No question.