Thank you for standing by, and welcome to the Perenti Group HY24 results presentation. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to the company. Please go ahead.
Good morning, and thank you for joining the Perenti First Half Results Call. My name is Mark Norwell, Managing Director and Chief Executive Officer of Perenti, and with me is Peter Bryant, our Chief Financial Officer. Moving on from our disclaimers and onto slide three. Once again, through the hard work and commitment of our people, we have delivered another set of record underlying financial results, and we are on track to deliver record results for the full year, underpinned by generating excellent free cash flow. Over recent years, we have continued to deliver on our 2025 strategy. We have addressed non-performing businesses, grown in tier one mining jurisdictions, rationalized the portfolio, and at the same time, we have focused on embedding sustainability into everything we do. In addition, on the 6th of October last year, we finalised the acquisition of DDH1.
We combined the four DDH1 brands with Ausdrill to establish our new drilling services division, which delivered positive earnings supporting our record underlying revenue and profit. The diversification of our businesses across the mining services value chain, geographies, and commodities, which now includes a much larger drilling services division, means that we are a truly diversified global business. We continue to focus our efforts on ensuring that the fundamentals of the business are robust while improving managing risk and capitalizing on opportunities. In the first half, our high-quality projects and businesses delivered record underlying financial performance with revenue of AUD 1.6 billion, record EBITDA of AUD 312 million, and record EBITA of AUD 149 million.
Just to put this in perspective, in FY22, we delivered AUD 176 million of EBITA, and only 18 months later, we have almost delivered that number in one half. Our record EBITA is up 10% on strong operational performance. If we exclude the impact of a provision we raised for Savannah, the business would have delivered AUD 156.7 million of EBITA at a 9.6% margin, which is very close to our 2025 strategy EBITA target of 10%. Our NPATA is up 20% on the prior period as a result of improved business performance and a reduction in our effective tax rate to 32%, primarily due to the acquisition of DDH1.
As per our forecast, leverage for the period was 0.9 times due to greater capital spend in the first half and the AUD 50 million of debt used for the DDH1 acquisition plus transaction costs. As we will discuss and as previously communicated, our guidance for leverage at 30 June is between 0.7 times and 0.8 times.
Furthermore, we are adding a free cash flow guidance metric for the full year with a very strong free cash flow in the second half. We expect that our free cash position at the end of FY 2024 will be greater than AUD 100 million. We are also confident in the outlook for the business beyond FY 2024. In consideration of the record underlying results in the first half and a very positive outlook for free cash generation in the second half, the board declared a fully franked interim dividend of AUD 0.02 per share. In addition, the board has also approved recommencing the share buyback subject to share price performance. These are tangible examples of the Perenti board focused on returning capital to shareholders given the strength and resilience of our business.
We have navigated challenges and still do, but at the same time, we have invested in the business to ensure a robust corporate structure coupled with a diverse and quality portfolio of mining businesses. This performance is testament to our people, not just their effort in the first half but over many years, which is a nice segue to the next slide. Slide four: Who we are. It is our 11,000 exceptionally talented and highly skilled people that underpin the resilience and performance of our business. We operate across 12 countries, over 10 commodities, and provide services to over 100 clients globally. And it's that deep global experience that has supported our recent growth into new jurisdictions and supports the continued success of our long-term operating regions.
With our four divisions and 13 operating brands, we deliver services across the mining value chain that provide scale and diversity to successfully navigate through commodity and service cycles. We remain a globally significant underground mining service provider, and we now have scale in our drilling services division, operating the second largest drill fleet globally. Our largest project in our portfolio only contributes 6% of revenue, and in the drilling services division, our average contract generates AUD 2.5 million of revenue. So while in recent months, it has been disappointing that two underground nickel projects in our portfolio have gone into care and maintenance, there was no impact on our guidance. Ironically, these two projects stopping actually represents an opportunity to transfer people and equipment to other projects within our global portfolio.
Our underground fleet is consistent across all of our sites, meaning we generally use the same mining equipment in Australia, Africa, and North America. So the circa AUD 40 million of fleet written down value from Savannah and Cosmos has been sent to other projects to displace new capital by canceling orders. In some cases, we'll also see increased returns from our redeployed fleet. For example, the fleet at Savannah was generating zero EBIT margin. Therefore, when it is redeployed to other sites, it will generate positive returns. This redeployment of fleet is one of the drivers for the reduction in FY24 capital guidance. As for the transfer of our people, our vacancy rates are now at all-time lows given that we have successfully found positions for all of our employees who chose to continue within the business.
As I said in the introduction, we have a business with very strong fundamentals. We have robust internal controls and governance structures. We have globally relevant scale. We are diversified, and we deliver sector-leading services. We have taken the time to get the basics right. We have outstanding people, and our client base consists of many leading mining companies. We are confident that our business will continue to deliver value, and certainly despite the ups and downs of the commodity cycle. Slide 5. As mentioned, our performance is underpinned by our 11,000 people, and there is nothing more important than their safety. In March last year, we announced the formation of a safety transformation task force comprising of internal leaders and external experts.
The task force and associated working groups in contract mining and mining services are making positive progress against their transformation plans, although there is still more to be done. In this half, work will continue on the current plans. Drilling Services will establish a safety transformation working group, and we are progressing discussions with a global miner to establish a partnership to advance safety at the client and contractor boundary layer and more broadly across the industry. As we outlined in our strategy update in June last year, sustainability is becoming increasingly important to our employees, our clients, our funding partners, and our investors. But aside from this, we truly believe that a strong focus on sustainability is absolutely the right thing to do, which will create enduring value for all our stakeholders.
In support of our focus to embed sustainability into everything we do, last year, we introduced our sustainability imperatives and priorities. Since then, we have made significant and tangible progress within very meaningful areas. A comprehensive update on progress of the safety transformation task force will be included in our 2024 sustainability report along with detail on our other sustainability initiatives. Moving to group performance, slide six. As outlined earlier, our first half performance, which included DDH1 since 6 October last year, was another record underlying result for revenue, EBITDA, and EBITA, and we are positioned for a stronger second half to deliver on our FY24 guidance. Our earnings would have been higher, but for the AUD 8.2 million provision related to the doubtful receivables balance associated with the Savannah underground nickel mine due to Panoramic Resources entering voluntary administration in November last year.
If we normalized for this one-off, we would see an EBITA margin of 9.6%. With our focus on debt, our leverage is trending in the right direction, and we'll accelerate down towards 0.7 times for FY24. Later in the presentation, there is a slide that shows us deleveraging from circa three times nine years ago to a forecast of below 0.8 times by 30 June this year, which is a great outcome, especially given the significant increase in revenue and EBIT. All in all, a very strong half and a stronger second half ahead. I'll now pass to Peter, who will give an overview of the financials.
Thanks, Mark. For those of you who are familiar with Perenti and have dialed into our results calls over the years, welcome back. To those shareholders who joined the register following the bringing together of Perenti and DDH1, welcome to what is possibly your first Perenti results call. We've made some minor changes to the historic structure of the deck so that the initial focus is on the consolidated financial results. Once I've expanded on the key financial numbers for the half, I'll hand you back to Mark, who will provide some further commentary around the performance of the divisions and, importantly, expand on the FY2024 outlook. Slide eight provides the bridge from the underlying numbers, some of which Mark just presented, to the statutory numbers that appear in the audited half-year financial statements.
Importantly and pleasingly, the statutory EBIT, EBITA, and NPAT before the amortization of customer-related intangibles all reflect an improvement on the underlying numbers. Over the journey, Perenti has reported stronger statutory numbers on several occasions, so this is not a once-off event. But nonetheless, it's nice when it happens. I think the five categories of the reconciling items are reasonably straightforward. That said, I'll give some brief context to each of them. The provisional purchase price accounting for the acquisition of DDH1 has delivered a gain of AUD 29.4 million, a positive outcome that I'll expand on shortly. Transaction and other one-off costs relate primarily to the acquisition of DDH1. Net foreign exchange gains reflect the requirement of the accounting standards for us to mark-to-market several balance sheet accounts. For clarity, this amount does not reflect the impact of exchange movements on the profit and loss.
It reflects balance sheet account movements. Idoba product development for the half was AUD 7.3 million. Finally, we have the net tax effect of the non-underlying adjustments. Moving to slide nine. As I just mentioned, Perenti booked a non-underlying provisional gain on the DDH1 acquisition of AUD 29.4 million. Firstly, purchase price allocation is the term given to the process of accounting for a business acquisition by the relevant accounting standards. When a business is acquired, the purchase price allocation process requires that the assets and liabilities of the business acquired must be restated to their fair value. For assets like plant and equipment, independent third-party valuations must be obtained to determine the fair value. The external valuation undertaken on the DDH1 plant and equipment resulted in an increase in the value of those assets of AUD 48 million.
Or put slightly differently, Perenti acquired those assets for AUD 48 million less than their fair value. Similarly, all the other assets and liabilities of the business acquired are reviewed and adjusted to reflect their fair value. The difference between this AUD 48 million uplift and the provisional gain recorded in the accounts of AUD 29 million relates largely to everybody's favourite subject, tax, and more specifically, tax effect accounting. There are various components to tax effect adjustment, with the largest relating to the fair value uplift of the plant and equipment. This uplift is effectively non-deductible for tax purposes, which, together with other less material adjustments, gives rise to a AUD 15.5 million purchase price allocation tax adjustment. I've tried to simplify the drivers of the gain, but it is a tad complex. To this end, there is further disclosure in the half-year financial statements.
I should also highlight the use of the word provisional. Given the complexity associated with accounting for acquisitions, the relevant accounting standard provides a 12-month window for purchase price allocation to be finalized. Thus, the numbers are provisional. Moving on to slide 10, DDH1 integration and synergies. In the simplest of terms, it's going very well, and we are on track to deliver the P&L and cash synergies that form part of the deal rationale. Having been through a few acquisitions and integrations over the years, I can honestly say this has been the best. When I look at the drilling division today, under its leadership, it's hard to believe that it's only been part of Perenti since October last year. Ausdrill has seamlessly transitioned into the new drilling division, and the DDH1 businesses have seamlessly transitioned into Perenti.
This is due, in part, to the Perenti operating model, which was designed to facilitate the expansion of our portfolio through acquisitions. But equally as important has been the alignment of the cultures and the quality of people in both businesses. To some extent, the timing of the acquisition in the context of the integration was perfect. The deal closed a week or so prior to Perenti's annual senior leaders' conference, which sees the top circa 50 leaders of the group come together. This timing meant the DDH1 leadership team were able to attend the conference, meet all the senior leaders of the Perenti group, and immediately form relationships, relationships that clearly contributed to the success of the integration. The delivery of identified synergies is on track, and Sy and his team, working closely with the other divisions of Perenti, are now focused on identifying additional operational upside.
Slide 11 reflects the statutory cash flow of the group for the first half. While the operating cash flow after capital for the half may look lower than expected, the result for the half was above our internal forecast. As Mark called out on the initial slide, we are guiding to free cash flow after net CapEx, interest, and tax for the year to be greater than AUD 100 million. There are a number of quite significant movements when you look down the elements of the cash flow, several of which were driven by the acquisition of DDH1 in October. Specifically, if you look at the second-last bullet point, you'll see AUD 50 million cash consideration paid to DDH1 shareholders, AUD 24 million for the payout of DDH1's finance facilities, and AUD 11.6 million in transaction fees payable to advisors, lawyers, accountants, and bankers acting for both DDH1 and Perenti.
The remaining bullet points on the page explain the key balances. For completeness, I note the statutory cash flow from operations is after our investment in Idoba product development. Ladies and gentlemen, I'll now hand you back to Mark.
Thank you, Peter. Now to our divisional performance, starting with contract mining underground on slide 13. As we expected, our underground mining business delivered another solid period with revenue growth across all regions. However, EBITA was down slightly due to the provision taken for Savannah and a couple of African projects down on scope, namely Yaramoko in Burkina Faso and some expansion challenges at Zone 5 in Botswana. Additionally, in line with the updated contract terms for Subika, where Newmont now provide all the fleet, and therefore, as a natural consequence, earnings are down slightly compared to prior periods when we owned the fleet and received a return on that fleet component. The items I have outlined delivered margins 11.1%, although if we normalised for Savannah, we would have seen the margin at circa 12%.
Positively, we are in discussions with Zone 5 in relation to contractual rate revisions and are expecting a positive outcome in the near term, which will support a stronger second half. Slide 14, surface mining. In the first half, with the establishment of the drilling services division and the inclusion of Ausdrill, their contribution to the surface mining segment has been removed. What immediately stands out in these graphs is the performance of the first half of 2023. However, for context, this includes an AUD 11.3 million retrospective rate adjustment for works completed at Iduapriem in prior periods. While first-half performance is better than FY22, the performance is still down on our targets.
Looking to the remainder of FY24, we expect that the second half will deliver stronger earnings and margins compared to the first half as Motheo A4 in Botswana ramps up and as our other four projects perform in line with contractual expectations. We still believe that a long-term average margin of greater than 10% is appropriate for our suite of surface projects, and the team are focused on delivering this outcome. Slide 15, drilling services. This slide demonstrates some of the value that we outlined when we announced the DDH1 acquisition. While the division is new in our reporting suite, we have nearly four decades of experience in the drilling sector and now operate the second-largest fleet of drill rigs in the world. The newly formed drilling services division has performed as we expected.
As you can see, historically, Ausdrill has delivered relatively consistent earnings, albeit at lower margins than DDH1. With the inclusion of DDH1 since 6 October, revenue increased by AUD 130 million and earnings increased by circa AUD 15 million compared to the first half of 2023. We are encouraged by the performance of the drilling services division with the objective to deliver margins above 10% for FY24 and beyond. Slide 16, mining services. In the first half, our mining services businesses delivered very strong results driven by strength across BTP and Supply Direct, partially offset by the technology product development of Idoba. BTP remains the largest contributor to mining services revenue and, in the first half, delivered increased utilization of its fleet and increased part and fleet sales. The improved performance more than offset the earnings impact of Idoba. Moving to our outlook on slide 18.
As I said upfront, I want to reiterate, given the relative stability of our contracts and the nature of the work that we complete, we have good visibility over the forecast performance of each of our projects and businesses. With the inclusion of DDH1 into the business for three months in the first half, naturally, there is a second-half positive increase to earnings. When cash outlay in the first half of the DDH1 acquisition, combined with front-end weighting of our annual capital expenditure, strong free cash flow will be delivered in the second half. So just to be clear, our second half will be stronger than the first half with a significant step up in cash generation to over AUD 100 million. We are confident in our FY2024 guidance, and we look forward to delivering on these commitments.
Onto slide 19, which demonstrates our track record on delivering on our earnings growth. I wanted to take our track record back 10 years to demonstrate that the Barminco acquisition fundamentally changed our business for the better. And other than the impact of COVID and cleaning up AMS challenges in FY21 and FY22, Perenti has gone from strength to strength. These charts demonstrate our track record of delivery. Since the Barminco acquisition, we have more than doubled our revenue, almost doubled our EBIT, and at the same time, we have reduced leverage by circa 60%, with the result more than half that of the business in FY15. When we delivered our 2025 strategy in 2019 and updated again in 2022, we called out fundamentally improving the business, which clearly we have done.
While we are positive about the performance, we are also focused on further improvements and significant improvements of that across all aspects of the business. We recognize that there are external factors that impact sentiment, but these metrics show how robust our business really is. There is strong demand for our services, and we are confident that the business is well-positioned for the next phase, the evolution of Perenti. This next phase will be explained further when we deliver our 2030 strategy this year, and we expect to cover off on how we will drive further operational performance improvements and generate consistent free cash flow and reduce gross debt, how we will be reweighting the portfolio to reduce risk and recycle capital, and where we are positioning Perenti to take advantage of the significant future mining opportunities that we have identified.
Once again, on behalf of the board and group executive, I'd like to thank everyone at Perenti for their commitment and contribution throughout the half. I'd also like to thank our clients and shareholders for their ongoing support. Thank you, and we'll now take 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 then two. If you're using a speakerphone, please pick up the handset to ask your question. Once again, to ask a question, please press star one on your phone. The first question today comes from Matthew Chen from Moelis. Please go ahead.
Morning, Mark. Just a question on the margins in contract mining, if you could. So I just want to clarify your expectations in terms of that EBITA margin in the underground part of the contract mining. That's kind of what are those expectations going forward, and how soon are you going to get to that 10% margin target in the surface part of the contract? Thanks.
Yeah. Thanks, Matthew. So firstly, with underground, as called out the first half, had the impact associated with Savannah, the minus AUD 8 million. That obviously won't continue into the second half, so automatically, we won't have that downward hit. So we will see a step up. We are expecting that those margins will get back to the circa 12% that we've had historically. A couple of other items there, just the ongoing, I guess, sort of ramp-up with Zone 5 and also working through the rate negotiations that called out that would see a step up there thereafter. And also the two other items that I've mentioned regarding margins, which we had the first half, and this is the first half that Subika equipment has all gone to Newmont. So the return on capital is excellent for that project.
But given we don't have margin associated with the ownership of the fleet, we've seen that come off but generating good cash. So in terms of underground, we see a stronger second half for underground performance. As for surface mining, this is now only the AMS component, given Ausdrill's transferred into the drilling services. We are looking for that to improve in the second half as the Motheo A4 project ramps up, which was awarded last year. So it's T3 and A4 now, so we expect that to continue ramping up in this half and into the first half of 2025 as well. As for when we get to the 10% margins, we'd be looking for that into FY2025 at the back end. So we'll see progressive improvement in this half, Matthew, but it won't hit 10% into future financial years.
Great. Thanks. That's really helpful. Just wanted to ask about your revenue by commodity, noting that it's nickel, 12% exposure in first half 2024. Are you able to quantify what that looks like going forward, given the callouts on Cosmos and Savannah? Thanks.
Yeah. Sure. So as you called out, when Savannah and Cosmos were included, we have circa 12% of our revenue associated with nickel. Taking out those two projects, it has it down to circa 8%, and that's predominantly with Nova and Spotted Quoll, and a percent of that is associated with work with the drilling division, which is predominantly BHP, Nickel West.
Okay. Are you able to quantify what the kind of splits there are? I suppose that Nova's probably a lion's share of that as against the Spotted Quoll part. Thanks.
Yeah. Your assessment's right there, Matthew, in terms of Nova's the larger component. As for sort of splitting down to each project and its revenue base, won't get into that bit with detail, but your assumption there is spot on.
Okay. Thanks. It's really helpful. Thanks, Alex. I'll pass it on.
Cheers.
Thank you. Once again, to ask a question, please press star one on your phone. We'll pause for a moment to allow parties to enter the queue. The next question comes from William Park from Citi. Please go ahead.
Good morning, Mark and Peter. Thanks for taking my questions. Firstly, I've just got a couple of questions. Firstly, just on Idoba, how much more do you have left to go? I mean, presumably, it's still AUD 15 million for this fiscal year, but just wondering how you're thinking about, I guess, the development cost with respect to Idoba beyond FY2024, please.
Yeah. Thanks, Bill. In terms of Idoba, your callout rate for AUD 15 million is right. We're just slightly down on that annualized spend in the first half. But AUD 15 million is what we're targeting, which we're expensing. And I will call out that when we mention the free cash flow generation of greater than AUD 100 million, that is all the expense of Idoba's already done. This is a very clean free cash flow after all expenses, so that's all taken into account. So just to be clear on that. As for FY25 guidance, Will, at this stage, we won't be putting out further looking projections for Idoba or any other part of that business. We will be providing that in due course when we release FY25 guidance. But AUD 15 million is what we're on track for this year.
Thank you. Just on your expectation of free cash flow, I don't know whether this was covered in the call. I jumped on late. My apologies. Just on your free cash flow expectation of over AUD 100 million, can you just step through how you're sort of getting there? Because if you're guiding for EBIT of circa AUD 315 million at the low range and then CapEx of AUD 350 million, so I'm just trying to understand what sort of the delta, the moving parts are to that, please.
Yeah. So in terms of that free cash flow guidance of over AUD 100 million, that's after all interest costs or tax cash costs, all staying business capital, all growth capital. So all of that is taken into account with that number. So as I mentioned, it's a very clean number, Pete. Anything to add there?
Yeah. I think it reasonably includes Idoba, and they're assuming 90% cash conversion, which historically, for a full reporting period, we've comfortably achieved, Will.
Thank you very much. Just one last if I could squeeze in one last one. Just in terms of how you're approaching guidance, would it be reasonable to assume that you're taking a pretty similar approach to the approach that you've taken in FY23, where you'd like to see some upside before updating the market with guidance, potential upgrades to guidance, and so forth? Just wondering how you're sort of approaching providing guidance to the market. Are you trying to be more conservative this time around to see if there are any upside in the near-term horizon? Thank you.
Yeah. Thanks, Will. We're always welcome upside to apparent guidance, of course. The approach we take is the same every reporting period. We run a very rigorous budgeting and then forecasting process within the organization across each of the divisions and corporate. We also run a risk and opportunity across the organization to end up with a guidance in the range we clearly stand by, given we've reaffirmed guidance. If we see upside sort of come through, then we'll share that with the market as per our disclosure requirements. But we're confident about guidance, hence putting it out.
Thank you. Thanks for taking my questions. Thank you.
Thanks, Will.
Thank you. Once again, to ask a question, please press star one on your phone. We'll pause one more time to allow parties to enter the queue. At this time, we're showing no further questions. I'll hand the conference back to Mr. Norwell for any closing remarks.
Thank you. And thank you, everyone, for taking the time to join our call, particularly those in Perth for the early start. As outlined, with our 10-year charts in the deck, we continue to deliver improved results at the same time reducing leverage. So we're very well placed to deliver further and ongoing value for our shareholders. So once again, thank you, and enjoy the remainder of your day.
Thank you. That does conclude our conference. Thank you for your participation. You may now disconnect.