I would now like to hand the conference over to Mr. Ian Testrow, CEO and Managing Director. Please go ahead.
Good morning, everyone, and welcome to Emeco's presentation for the 2025 half-year financial results. Thank you for taking the time to join us today. Today I'm accompanied by Emeco's Chief Financial Officer, Theresa Mlikota. Together we'll run through the investor presentation launched on the ASX this morning and then provide an opportunity for questions at the end of the presentation. As always, before we begin, I'd like to draw your attention to the disclaimer on slide two, which covers the usual important information about forward-looking statements. Turning to the agenda on slide three, I will begin with the business and operational highlights before passing on to Theresa for a more detailed look at the financials. I'll then wrap up overviewing our strategy, sustainability, and outlook before we move on to the Q&A portion of the call.
Starting on slide five, Emeco has delivered a strong first-half result with robust earnings and margin growth and good cash generation. Importantly, Emeco's reset and simplified business model is clearly proving its strength and resilience. Revenue increased by 11% versus prior comparative period. Operating EBITDA was up 6% to AUD 146 million. Operating EBIT increased 13% to AUD 68 million, and operating NPAT was up 15% to AUD 38 million. EBITDA margin grew by 610 basis points, and EBIT margin grew by 360 basis points. Pleasingly, operating free cash flow was up 22% to AUD 49 million, with a cash flow conversion of 94%. The strong cash generation led to a significant improvement in our balance sheet leverage, now 0.84x , which is well below our target of one times EBITDA.
The first-half results reflect our ability to carefully manage costs, which, in combination with available fleet capacity, strongly positions us to further grow our earnings in the foreseeable future without the need for significant growth capital. We're delivering solid results with return on capital growing 40 basis points versus first-half 2024 and 70 basis points versus the full year 2024 due to the realization of cost efficiencies and the placement of growth fleet into projects. With ROC currently at 16%, we're well on our way to achieving our long-term target of 20%. Operationally, our negotiations with key customers on major contract extensions are well progressed, and we hope to complete these discussions in the coming weeks. We also delivered a major overhead and cost management program during the period, which has strengthened the business.
Additionally, we've invested in digitization and business improvement reporting tools to further improve our industry-leading site management capabilities. I'm really proud of the way we've reshaped and simplified our business model. We'll continue to build on our competitive advantages, which are superior site maintenance services, a strong balance sheet, and our low-cost industry position. We'll use these strengths to win projects and provide customers value from the current strong pipeline of opportunities in front of us. Moving on to slide six, it is pleasing to see the positive trend in our earnings and cash flow, also delivering a stronger balance sheet. A major focus on cost management across overheads and our operations contributed to our steady improvement in earnings and margins. Moving on to our operational highlights, I'd like to begin with safety, as it continues to be our top priority at Emeco and underpins our financial and operating performance.
Slide eight highlights our stable safety performance, with our lost-time injury frequency rate remaining at zero, while our total recordable injury frequency rate remains stable at 2.8. Emeco will never be complacent about safety and will continue to diligently monitor and make improvements as part of our broader health, safety, and environment and training strategic plan. Slide nine provides a detailed overview of the rental business. This now includes our surface and underground operations streamlined into one rental business. With a fleet size of over 850 pieces and more than 450 employees across 120 projects, Emeco is Australia's largest provider of open-cut and underground rental equipment. We use this scale to create a cost, quality, and service competitive advantage for our equipment rebuild, asset management, and maintenance capability. We provide our customers reliable equipment and best-in-business service.
The rental business delivered a solid revenue growth of 13% to AUD 300 million, driven by growth projects in surface coal and underground base metals. Earnings growth was propelled by a closely managed R&M repair and maintenance program and a reduction in regional overheads. Surface rental utilization averaged 85% for the half, while underground utilization was 50%. Discussions with long-term customers to extend existing contracts are well progressed. Our business development teams have built a solid pipeline of project opportunities. The business is well positioned on cost, quality, and fleet capacity to secure new work. The extent of the cyclone activity and flooding in Western Australia and Queensland does provide a level of uncertainty around utilization and timing of new projects, but we expect our customers to ramp up activities to recover lost production when normal operations resume. Over to slide ten covering our Force business.
Force comprises of our workshop, component rebuild centers, and field services team capability. They provide a high-quality and cost-effective solution to both our customers and our rental business. We have seven workshops in total across Australia with around 400 employees. Looking at the financials, revenue was up 5%, driven by new business wins in underground, East Coast coal projects, and fabrication services. However, earnings were slightly lower due to a reduction in high-margin rebuild work, which is partly offset by overhead cost efficiencies. During the half, Force delivered 66 machine rebuilds and secured several new customer contracts. I'd like to stress the importance of Force business as far greater than the numbers present on this page. Force helps create a competitive advantage for our ability to rebuild equipment and components.
This provides a cost and quality advantage as it positions us to win work, provide customers a reliable and cost-effective solution, and achieve strong returns for our shareholders. Force is what makes us capital efficient. We're also pursuing opportunities to widen our workshop capabilities, including services for battery-powered fleets. The Force business enables us to play in this space and build a capability without significant capital investment. I would like to hand over to Theresa to run through the financials.
Thank you, Ian, and good morning, everyone. Thank you for joining us for the call. Just a note before I get into the numbers, as with prior presentations, we refer to operating results, which are non-IFRS. You'll find a reconciliation of our statutory results in the appendices commencing on slide 26 of the investor presentation pack. However, for now, I would like to turn your attention to slide 12, which summarizes the group profit and loss. Ian summarized the key numbers, so I won't repeat these again. The table on the left of the slide compares the FY24 result and a first-half, second-half split. We are delivering a steady increase in earnings through the business improvement initiatives we have previously flagged.
Earnings from new rental projects and high returns from the FY24 growth CapEx program contributed to the strong results, in addition to the cost savings across overheads, labor, and repairs and maintenance. Our overhead cost-out program delivered AUD 15 million in annualized cost savings executed between October and the end of February, bringing forward the timeline on the previously flagged initiative. Operating EBITDA was up 6% to AUD 145.8 million. Operating EBIT was up 13% to AUD 68.3 million, and operating NPAT was up 15% to AUD 38.3 million. Margins improved significantly on the prior corresponding period, with EBITDA margin increasing from 32% to 38% and EBIT margin increasing from 14% to 18%. As Ian will touch on later in this presentation, return on capital continued to show good improvement, up 40 basis points on the prior corresponding period and up 70 basis points on FY24.
With an ongoing focus on our business improvement initiatives, we continue to progress well towards our target of 20% ROC. Moving on to slide 13, the waterfall chart on the left steps through the major cash movements of the half. Free cash flow generation is an important priority for us, and this was strong during the half. It was primarily driven by improved earnings and cash collections, with cash conversion at 94%. Operating free cash flow was AUD 48.8 million in the half, up 22% versus the prior corresponding period. Investment in working capital was AUD 9.7 million. Financing costs of AUD 12.6 million reflected elevated debt levels early in the half and higher base rates. Net debt levels reduced by AUD 38 million during the period, benefiting from strong cash generation. Capital expenditure was again limited to sustaining CapEx and equated to 96% of depreciation.
Fleet currently has earnings growth capacity without the need for growth CapEx. There were no share buyback or dividend payments during the period. Our current leverage sits at 0.84x , well below our long-term target of one. Our ERP project is progressing in line with our budget and program timeline. Expenditure during the period totaled AUD 2.1 million, with a further AUD 4.6 million to be spent in the second half. We incurred AUD 2.1 million in restructuring costs related to the delivery of our overhead reduction initiatives. As with the prior year, no income tax was paid due to the company's carried forward tax loss position, which was AUD 281 million at the end of the period. Looking at slide 14, our balance sheet continues to improve and benefit from strong free cash flow generation and reduced CapEx commitments.
As I mentioned, our leverage is now below one, following a net debt reduction of AUD 38 million. We remain in a healthy position with future flexibility for capital management or growth. Our balance sheet strength is also reflected in our maintained credit ratings. Moody's upgraded from B1 to Ba3 in January 2024, following on from the upgrade by Fitch to BB- in February 2023. Over the half, we saw good cash collections, which resulted in reduced receivables, and the exit from our underground contracting business has resulted in lower debtors and creditors. The net increase in fixed assets and intangibles was driven by transferring assets from held for sale into PPE. The movement in working capital includes non-cash movements in DTL and settlement of the sale of underground assets to Macmahon.
The AMTN notes of AUD 250 million comprising the bulk of our debt have a fixed interest rate of 6.25% and mature in July 2026. The company has strong liquidity of around AUD 175 million available at period end. This included AUD 110 million in cash and AUD 65 million in an undrawn revolving credit facility. Slide 15 shows greater detail on the company's debt maturity profile and liquidity position. The slide is self-explanatory, highlighting our committed facilities and total liquidity. However, the main thing I wanted to reiterate is that with lower debt, an improved leverage ratio, and improved credit ratings, we are well placed coming into the debt refinancing process ahead of the maturity of our notes in July 2026. I'm happy to talk more about the finances in the Q&A portion of the call, but for now, I'll hand over to Ian.
Thank you, Theresa. Moving on to our strategy. Slide 17 provides an overview of our scale and competitive advantage. On the company scale, I mentioned earlier that Emeco is Australia's largest provider of surface and underground rental equipment, with over 850 pieces of equipment in our fleet. Our national footprint and seven strategically located workshops, along with over 900 employees across 240 projects, position us to provide exceptional service to the Australian mining industry. All of these elements are critical to Emeco providing industry-leading low-cost rental services, underpinned by best-in-business maintenance support for our 200 customers and superior returns to our shareholders. Our revenue is well diversified across customers and commodities, underpinned by our workforce and workshops in key mining locations across Australia. Moving to slide 18, our core strategy remains unchanged.
We are focused on three pillars that guide our team in growing a sustainable and resilient business and creating long-term value for our shareholders. These pillars are summarized on this slide, but to reiterate, they are to be Australia's lowest-cost, highest-quality, technology-driven mining equipment rental provider, to maintain a balanced and diversified portfolio by ensuring a diversification across customers, projects, commodities, and regions, to exercise disciplined capital management by targeting one times leverage, maintaining free cash flow, and our 20% ROC target, and retain flexibility in our capital structure. We're well on our way of delivering against these targets. Moving to slide 19, return on capital continues to be a key financial performance metric for the business. ROC increased to 16.5%, up 40 basis points higher than the prior corresponding period and 70 basis points higher than FY24. Improvement initiatives will accelerate the strength in business performance.
In particular, as Theresa mentioned earlier, we brought forward our overhead savings program, which will benefit more fully in the second half. We also continue to focus heavily on cost management across our projects and workshops. We have a strong pipeline of new projects, which we expect to assist in the increase in equipment utilization and earnings in both surface and underground, without the need for growth CapEx, given the available fleet capacity. We also expect increased mining activity as customers recover operations from recent weather events. We will progress with contract extension negotiations with a number of long-term customers and expect to see improved earnings in FY26 from these reset contracts. We're delivering good progress in our journey to deliver our ROC target of 20%.
The focus on improving ROC has a significant positive impact on operating free cash flow, and our target of ROC of 20% equates to an operating free cash flow of around AUD 140 million. Our current run rate is AUD 100 million, which is up from AUD 87 million in FY24. Rounding out our strategy on slide 20 is our position on environmental, social, and governance practices, or ESG. Our continued focus regarding ESG is centered around each of our key stakeholder groups. We aim to ensure our business model drives solutions for our customers, a safer work environment for our people, support for the communities in which we operate, and deliver value for our investors. In our 2024 sustainability report, which is available on our website, we published our first climate change position statement. Finally, moving on to our second half priorities and outlook on slide 22.
Important priorities for the remainder of the financial year will be to continue to focus on disciplined capital expenditure and cost efficiency to drive returns and cash flow. This will further improve our leverage and position us well to refinance our bonds, which mature in July 2026. We'll continue to build market share for our new projects from our pipeline of opportunities. We'll expand and grow our fully maintained projects where our service offering is differentiated from our competitors. When we fully maintain our equipment, that's where we provide our greatest value to our customers, and the contract tenure is longer as we're much stickier. We'll also pursue opportunities to expand the Force service offering, including plans to enhance in-field and workshop capabilities for battery-powered fleet, and we'll continue the digitization of our operations to expand our competitive advantage.
Moving to our earnings guidance, we've reiterated our guidance targeting at least AUD 300 million in operating EBITDA for FY25. But Queensland floods and WA cyclone activity may continue to impact utilization and timing of pipeline opportunities. Our target second half operating EBIT run rate is expected to drive ROC to 18%. Other points to note: FY25 SIB CapEx is expected to be circa AUD 160 million-AUD 165 million or AUD 155 million-AUD 160 million net of asset disposals. New growth CapEx: FY25 depreciation is expected to be AUD 160 million-AUD 165 million. ERP spend is expected to be in the order of AUD 7 million for the full year. Before we move to questions, I want to again call out our investor highlights on slide 23 to emphasize our competitive advantage.
As Australia's largest mining equipment rental provider, we're confident that our simplified business model and continued execution of our strategy will enable us to deliver sustainable growth and increased shareholder returns. We have demonstrated the effectiveness of our business model and strategic focus in the result delivered today, and we'll continue to leverage this for further growth and returns for the remainder of FY25. With that, I'll now hand over for questions.
We will now begin the question and answer session. If you do wish to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Sophia Mulligan at Macquarie. Please go ahead.
Hi, guys. Can you hear me? Sorry, can you hear me?
Yes, we can hear you.
Great. Congratulations on the result. Just two from me quickly. The first one just on the tender pipeline. So I was wondering if you'd just give an update on how you're seeing the pipeline and any opportunities specifically by commodity or region worth calling out?
Yeah, I'll answer that one. We're feeling really good about the opportunities in front of us, specifically for the work that we do where we add the greatest value for our customers, and that's with our fully maintained projects. So yeah, feeling really good about that. There's a few projects that we're actively working on and hoping to close out very quickly and mobilize very quickly as well, predominantly in coal.
Great. And just second one in terms of any major tenders that you might have coming up for renewal in the second half?
Yeah. Oh, sorry, can I just touch on before? We've actually got some pretty solid opportunities in underground as well in the hard rock that we're working on. I think we actually have closed those out. So that's more around mobilization. So both in the surface and the underground, the pipeline is strong, and we're executing those works. When you mention tenders, I'm actually really excited about that. There's a couple of major contracts that we have that are long-standing, very, very long tenure, and we've been renegotiating those contracts for long-term extensions. I'm really impressed with how the team's gone about those negotiations and also with the customers as well. I feel very good about closing them out in the next couple of weeks for long-term extensions, creating win-wins for us and our customers.
That's great. Thanks, guys. We'll jump back in the queue.
Thank you. Your next question comes from Gavin Allen at Euroz Hartleys. Please go ahead.
Good morning, guys. Great results. And thanks for your time. Just a couple of quick ones for me. So just a bit of your surface utilization is at 85%. Just a bit of flavor maybe on how we think about your opportunities to deploy that, to say, let's just say 90% to pick something. Is that about new customers in your minds, or is that about existing customers managing stuff like weather? That might be a good start.
Yeah. No, a little bit separate. There's a bit of capacity in our fleet, actually. Having a good solid result the way that we have, the pipeline we're bidding, particularly around those fully maintained projects and the ability to place that equipment into these projects, creates some real operating leverage for us, mate, and gives me great confidence that the way this business has been reset, simplified, focus on what we do best, these projects are ahead of us, gives us real operating leverage as we close out FY25 and go into 2026. What I really like about this is, based on the result, the cash flow generation, the deleveraging, there's growth ahead of us without further growth capital for the foreseeable future.
So the operating leverage and the ability to generate further free cash and deliver further is really there in this business, and I'm feeling really good about it.
Yeah. No, that's great. And just in the interest of clarity, and the things are sort of linked to what you've just said there, I think, Ian, but you're not backing away from the idea that you can do sort of 18% ROIC in the second half, or at least that's certainly the target. I mean, there's some math you can easily, well, we can very easily wrap around that, that provides some reason for optimism, but I'm just sort of clarifying that you can kind of see your way forward to that 18% fairly clearly.
Yeah, mate, that'll be the run rate that we close at. That's what we're forecasting at the moment. We feel good about it.
Yep. Great. Thank you, guys. Terrific. That's plenty for me.
Thank you. The next question comes from Thomas Sharp with FIIG Securities. Please go ahead.
Hi, good morning, Ian and Theresa. And thank you for letting me ask some questions. And yeah, likewise, congrats on the results. I just have two questions, if I may. The first is sort of a bit of a combination from some of the questions that some of the previous guys answered, but I was just interested in a comment from the announcement which said that you'd be looking at deploying equipment into new projects over the remainder of this year. I was just interested in what those new projects may be and whether they were contracts with brand new customers or whether they were more expanding projects with ones that you currently already work with.
Bit of both, mate. Hey, Thomas, Ian here. Yeah, a bit of both. The underground one's new. The surface one's a bit of a combination.
Okay, perfect. Thank you for that. And then just one more. I noticed in the, I think, the FY24 update, you mentioned that you'd suspend your capital management program for FY25, so your buybacks and dividends. I noticed that wasn't explicitly mentioned in this update. I was just wondering if that still held true?
Yeah, that's the case. As you can see from our results, we're excited at our leverage to 0.84x against our target of one times. We're excited about the business's ability to generate cash and further deleveraging. As you're aware, our bonds mature in July 2026, and so we're positioning ourselves well as we look to refinance those bonds. I am one member of the board, so it's a board decision, but I anticipate that we'll continue with our existing path until we do our refinance.
Okay, great. Thank you, guys. Well done again.
Thank you.
There are no further questions at this time. I'll now hand the call back to Mr. Testrow for closing remarks.
Thank you very much. Thank you to those that have attended. Thanks to the Emeco team for such hard work. Particularly, the finance team worked really hard for these periods, and thanks to all our other employees that have dialed in for delivering on a very solid result. I appreciate it. Hard work. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.