Good day and welcome to the Perenti Global Limited HY22 results presentation. All participants are in 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'd now like to hand the conference over to Mr. Mark Norwell, Managing Director and CEO. Please go ahead.
Good morning and welcome to Perenti's first half FY 2022 results call. My name is Mark Norwell, Managing Director and CEO of Perenti, and with me today is Peter Bryant, our Chief Financial Officer. Starting on slide two. At a consolidated level, our first half result has slightly exceeded our expectation, and we are very pleased with our progress to deliver our full year FY 2022 earnings guidance. Revenue was up at AUD 1.2 billion, driven by a range of factors, including the commencement of several new projects, further ramp up of our growth projects, and scope growth on existing operations. Despite our strong revenue growth, we delivered a reduced operating margin due to cost escalation, supply- chain constraints, order restrictions, the very tight labor market, and project ramp ups. I am, however, pleased to say our earnings remain slightly ahead of expectations.
Moving to our cash collection and balance sheet. We are very happy with our cash conversion at 94%. This is the fourth consecutive reporting period where our cash conversion has been above 90%, which is a great example of the focus our team places on cash management. At the end of the half, our leverage was 1.3x , which was lower than forecast due to stronger than forecast cash conversion and equipment that was scheduled to arrive in December being pushed out into January due to global supply- chain challenges. Overall, given the macro challenges, the business has delivered a sound result. On to slide three. Beyond the headline numbers, we continue to deliver operationally and execute our strategy as we position the business for the future.
Despite a very tight labor market, we were able to expand our employee base by 13% as we welcomed an additional 1,000 new people across our business to meet the needs of our growth and project ramp up requirements. With our additional people, we delivered strong underground revenue growth, which offsets some of the margin compression due to cost escalation, supply- chain issues, and labor shortages. We also continue to deliver enhanced surface performance underpinned by further improvements in AMS. We continue to execute our strategy throughout the half. We signed a partnership agreement between Sumitomo and idoba, under which we will work together on digital mine optimization in carbon emission improvement opportunities. We also finalized two complementary acquisitions, which totaled less than AUD 10 million. Although I would note that whilst the work was done in half, the agreements weren't finalized until just recently.
Partnership and acquisitions are supportive of our idoba strategy to build complementary core capabilities that in time will deliver new technology-enabled products and services. As previously communicated to the market, we've liberated over AUD 85 million of cash through the divestment of MinAnalytical property and small equity holdings. Overall, an excellent outcome. In support of our strategy, we formed a Board Sustainability Committee and continued to focus on safety improvements. We are also positioned very well for the future. We have AUD 5.7 billion of work in hand and a pipeline of AUD 9.5 billion. We released our capital management policy, and we are finalizing our revised strategy, which we plan to release this half. In short, our team are executing very well despite the headwinds. We continue to execute our strategic plans, and we are focused on the future to deliver sustainable returns.
Slide four, safety and sustainability. This is an area of critical importance at Perenti. We continue to invest in safety resources and programs to improve safety performance, and sustainability is a key component of our strategy review as we look to evolve our business in support of delivering improved outcomes to all stakeholders. Firstly, on safety. As outlined during our FY 2021 results call last August, it was with deep sadness that on J uly 12th we lost our colleague, Troy Cameron, at the Hemlo Mine in Canada. Our support and thoughts continue to be with Troy's family and friends. We've completed a joint investigation with our client and have addressed many of the findings from the investigation specific to Hemlo, and where applicable, across our business more broadly.
We continue to focus on improving safety through the organization, and with so many new starters within our business and the industry, that focus is absolutely critical in keeping current and new people safe. Pleasingly, despite the significant labor constraints, we employed 1,000 more people through our business through the half, and we are still actively recruiting more employees to support our operations. As I mentioned earlier, sustainability is an important focus for the industry and clearly a focus for myself and the team. We established the Board Sustainability Committee, with Tim Longstaff as the chair. During the period, we released our position statement on eliminating sexual harassment in the mining industry, and in support of this statement, we released our It's Not Okay campaign. We also progressed our roadmap towards decarbonization and continued our participation in the Electric Mine Consortium.
Slide five, continuing to deliver on our 2025 strategy. While we are currently completing the review of our strategy, we've made significant progress on all five strategic pillars. I've already touched on the key areas of operational excellence, organizational health, and technology-driven future. I'll briefly cover strategic growth and then take some time to talk about our financial capacity. As outlined last year, our strategic review is focused on strengthening our approach to capital management and allocation, reviewing our current portfolio of services, regions, and businesses, optimizing our business performance to increase generation of free cash flow and utilizing technology and data to develop capital- light businesses. In addition, we continue to focus on improving foundations of our business, which has seen an overhead increase in prior periods. However, this investment is critical in supporting our future.
While it is important to invest in our business foundations, cost management remains a focus across the business, including updating our cost allocation principles, which I'll talk to later in the presentation. We are covering our financial capacity pillar on the next slide by focusing on capital management. Slide six. In December last year, we released our capital management policy to the market. The policy is underpinned by the alignment of our projects and businesses to focus on generating greater free cash flow. With this, we then provided an outline of how we will prioritize that cash. We will be prioritizing our cash allocation to support leverage reduction with a target of 1x in the medium to longer term. Although we will keep an eye on value-accretive opportunities as we also focus on decreasing our leverage. Our recent corporate activity has been in accordance with our policy.
Late last year, we divested MinAnalytical and our underutilized property asset. We also divested some corporate equity, which was related to historical drill- for- equity positions. These activities liberated AUD 85 million of cash and delivered an NPAT of AUD 29 million. This cash will be recycled according to our capital management policy, principally reducing leverage. As part of capital management and as announced late last year, our dividend policy has been amended to support leverage reduction. Therefore, the Board has declared that no interim dividend will be paid this half. We'll also look at our balance sheet and continue to identify opportunities to retain balance sheet strength and flexibility. We will look at growth through the lens of capital- light opportunities, but as we have recently demonstrated, we will actively manage our portfolio. In addition, we will evaluate the opportunity for share buybacks where appropriate.
The actions we are taking under the capital management policy, along with our revised strategy, will in time improve our margins, generate stronger cash flow, and create balance sheet strength and flexibility to deliver improved shareholder value. Slide seven. I'll now step through business performance at the group level and then into each segment, underground, surface, and investments. Slide eight, underlying group performance. Earlier, I mentioned we have stabilized our overhead costs as we continue to invest in our business foundations, and we have updated our cost allocation principles. We have reallocated current and historical group cost items to the relevant operating segment from which they were generated. This is to more accurately reflect like-for-like performance, both historically and going forward. You will see our historical earnings restated in this presentation. By way of example, employee bonuses were included in our overhead costs.
Now they are allocated to the home cost center of the employee. This isn't about making the numbers look better, it's about accurate reporting and management. Onto the results. At a consolidated level, revenue was up 18% as a result of our growth projects, scope increase of existing mines, and some pass-through of cost increases. EBIT was in line with our expectations and supports our full- year guidance. Pleasingly, our revenue is now 57% from Australia, Canada, and Botswana, which is up 5% on the last half. We have specifically focused on securing work in Botswana and Canada, given they are excellent jurisdictions to operate. We now have two projects in each country, which is a credit to our team to be able to execute our strategy throughout the global pandemic.
We are also realizing an increase in revenue from commodities that are critical for electrification and decarbonization. Slide nine, underground. Our underground business delivered strong revenue growth driven by the ramp up of Zone 5, Savannah, Cowal, and our Canadian projects. EBIT was off 1.8% due to macroeconomic margin compression, growth projects, and the shifting of earnings to lower- risk and therefore lower margin regions. The largest area of compression was felt on our Australian underground projects, particularly Agnew and Dugald River. Across the rest of the underground projects, I am pleased they delivered consistent earnings versus the first half of FY 2021, while our Canadian projects delivered a 50% increase in earnings, albeit from a relatively low base. The ramp up of Zone 5 is progressing, but earnings are being impacted by COVID-19- related labor issues.
Looking at the remainder of FY 2022, we expect to see improved performance across our Australian projects as cost increases flow into our rise- and- fall calculations. In summary, our underground business continues to perform well despite the macroeconomic- related margin compression. Onto surface, slide 10. This slide speaks for itself. As you can see, since the announcement of the implementation of our AMS strategic findings, we have seen our AMS business deliver incremental and sustainable improvements with the third consecutive period of earnings growth. Despite COVID-19 related operating challenges, the Australian business, which consists of exploration, drilling, and drill and blast, continues to perform well. In the second half of FY 2022, we expect to see further improvements in the surface business on the back of another AMS earnings increase underpinned by the ramp up of Motheo and Iduapriem.
While earnings are still not at the level we are looking for, I'm extremely pleased and grateful to the surface team and support team members more broadly. Slide 11, investments. As I mentioned earlier, idoba was reallocated from group costs into the investment segment. Therefore, current and historical results have been restated. As you can see, the investments business delivered revenue growth related to idoba, but also from stronger demand from MinAnalytical, and BTP is slightly ahead of previous periods with a strong sales pipeline to deliver its growth in the second half of FY 2022. From an earnings perspective, we saw solid earnings performance across BTP, MinAnalytical, as well as Well Control Solutions, Supply Direct and Logistics Direct, driven by stronger pricing environments and improved productivity.
FY 2022 continues to be a year of growth and investment with idoba as we embed the acquired businesses as well as build the structures that will underpin longer- term earnings growth. The businesses that make up idoba, Sandpit, ImpRes and Optika, are performing well and are delivering consistent profits. The EBITDA loss for idoba is related to the strategic investment in product development, technology and corporate governance requirements. The second half, we expect earnings to be similar or slightly above the first half as the improvements driven by a stronger sales pipeline from BTP will be partially offset by the divestment of MinAnalytical. Slide 12. I will now hand over to Peter, who will step through the financial results in more detail.
Thanks, Mark, and let me start by also welcoming everybody to the call. I was hopeful that over the coming days we would be meeting face to face with many of you, but unfortunately that's not the case. Let's hope with last week's announcement that the WA border is opening after circa two years, we can meet face to face in the near future. As Mark said, we are presenting numbers that are slightly ahead of our internal forecast for the half. Revenue was up, EBIT was up and leverage was better than expected. Like pretty much all businesses, particularly in the resource sector in WA, we've seen some upward pressure on our cost base. Despite this cost pressure, we achieved an absolute EBIT number that was slightly better than our forecast.
The cost pressures are real, but as borders open and supply chains improve, we anticipate this cost pressure will moderate. In the second half, we will also see the positive impact of our rise- and- fall provisions, which will provide some relief. Against this backdrop, I see a real opportunity for margins to improve. Moving to slide 13. I won't provide any commentary on EBIT as it's been well covered already. Our profit before tax or PBT for the half was AUD 53.6 million, reflecting an interest expense of AUD 23 million, which is consistent with the expense recorded in the prior half. I'll talk a bit more about the debt structure and leverage in a couple of slides. Although not directly evident from the slide, our effective tax rate was stable at 31%.
With interest and tax expense stable for the half, we delivered an underlying NPATA of AUD 34.9 million. Our statutory NPATA, the bottom line of the table, was AUD 41.5 million, which is AUD 8.32 million greater than our underlying number, compared to the prior corresponding period, was up AUD 86 million. It's always nice to be able to report a statutory result that is above the underlying number. Moving on to the next slide. It's a pretty clean reconciliation. The two adjustments of note relate to the very successful sale of MinAnalytical and our exit from the Sakari contract. As announced last December, we were successful in selling MinAnalytical. This transaction, which generated circa AUD 43 million of cash into the business, also delivered an accounting gain to Perenti of just shy of AUD 30 million.
Which, yes, if you did the math, was a great return on our investment. For those who aren't aware, Mineralogical was a pioneer business in the utilization of PhotonAssay technology developed by Chrysos. Of note, we continue to hold a reasonable investment in Chrysos and see some real upside in the coming months. On the other side of the ledger, we booked an AUD 23 million expense related to the non-cash impairment of customer-related intangibles. What does this mean? When Barminco was acquired back in 2018, the difference between the book value of the assets acquired and the amount paid was reflected as an intangible. Intangible had an element of goodwill and an element that represented the estimated value of the contracts that were acquired. This is called the customer-related intangible.
The customer-related intangible was then amortized over the estimated future life of the contracts or the relationships. One of the contracts that was acquired was Sakari. With our underground business exiting Sakari at the conclusion of the most recent contract, we were required to write off the unamortized balance of the customer-related intangible that was attributable to that contract. Other than the two items I've just run through, there are no material adjustments between the underlying and the statutory result. Moving on to the cash flow, which is presented on slide 15. Mark has called out the cash flow conversion, which at 94% was above our internal target. I won't run through every number, but I will call out a couple. Cash tax at AUD 35 million is notably up.
As a global business, managing our global tax affairs is front of mind. We are equally as mindful of our obligation to the countries in which we operate and our desire to be a good corporate citizen. Against this backdrop, the step up relative to the prior corresponding period is largely due to the payment of an additional AUD 4.5 million of withholding tax related to the payment of dividends from foreign operations back to Australia. Sustaining business or SRB capital was just shy of AUD 100 million, which is 8% of revenue. As you would have heard us say before, we generally see sustaining business running at around 10% of revenue, which is aligned, which in turn aligns with our depreciation. Growth capital is called out in the bullet points and relates mainly to the Motheo, Zone 5, and Iduapriem.
Finally, on the positive side, as you've already referred to, we generated cash inflows of circa AUD 78 million from the sale of land and buildings in Perth metro area and the disposal of MinAnalytical. Slide 16 gives an overview of our debt stack and some of the key credit metrics. The structure is unchanged. The only point I'll make relates to leverage. Leverage for the half was 1.3x , which was consistent with the prior period, but better than the guidance we provided late last year. To reiterate Mark's earlier comments, this improved leverage flow from a credibly expected cash flow conversion at 94%, we had forecast 85%, coupled with capital spend that was deferred due largely to supply issues or slippages. That's it from me. Once again, thank you for joining the call, and I'll hand you back to Mark.
Thank you, Peter. Now on to the near-term priorities and outlook. Slide 18. All in all, it has been a very busy few years, and the first half of FY 2022 was no different. Looking ahead, there are several catalysts that we expect to deliver on in the short and medium term. As we have stated previously, in the second half of FY 2022, we will provide the market with our updated strategy. As outlined at our AGM in October 2021, our updated strategy will incorporate the principles of our capital management policy. We will allocate capital to the most value accretive opportunities and through technology, data, and leveraging our deep mining capability, we will seek to optimize the performance of our projects and businesses to maximize the generation of free cash flow.
We will prioritize leverage reduction to our target of 1x in line with our capital management policy, although we will still be on the lookout for value- accretive growth opportunities. In addition, we will continue to review our current services, regions, and businesses to ensure our portfolio is optimized to deliver sustainable improvements and shareholder value in the short, medium, and longer term. Our strategy will outline our broader sustainability roadmap, including a focus on decarbonization. Slide 19, priorities and outlook. In the near term, we will continue to focus on delivering excellence across all projects while working to successfully ramp up our growth projects. In the underground business, we expect to see a stronger second half, predominantly from our Australian projects, as improved rates are generated through the rise- and- fall mechanisms and easing of labor constraints.
In surface, we are forecast to see an incremental improvement in the second half as Motheo is expected to start underpinning further revenue and earnings growth. We expect to see marginal growth in earnings from BTP. In idoba, we will continue to collaborate with Sumitomo, while also welcoming our newest team members from Orelogy and Atomorphis . We have increased our FY 2022 revenue guidance while maintaining our EBITDA guidance in the ongoing macro challenges. We now expect to deliver revenue of between AUD 2.2 billion and AUD 2.4 billion, with earnings of between AUD 165 million to AUD 195 million. Thank you, and we'll now take questions.
Thank you. Your first question comes from Nicholas Rawlinson from Jefferies. Please go ahead.
Hi, guys.
Apologies. We'll attempt to get back in touch with Nicholas. For now, the next question is from Andrew Dolan from UBS. Please go ahead.
Hi, Mark, Peter. Just the first one on the underground margin, just the 10% versus the second half of 2021. Is it fair to assume that that's just primarily Barminco and Australia and AMS has been stable, or how should I think about that margin?
Yeah, Andrew, Mark here. Thanks for the question. Yeah, your assumption's right there. Certainly, we've seen greater challenges within the Australian market with labor, with borders closed, et cetera. Offshore, the team continue to navigate the challenge as well, even though they've had two years of it now. That's the right assumption.
Just on the second half recovery, I mean, you talked about some of the rise and falls. Is there anything, you know, besides just the mix as you change regions and stuff, is there any sort of structural element, you know, can Barminco get back to sort of the historical margins it's done over time or?
Yeah. You mentioned about the difference in mix. I think that's a key point there, Andrew. As we sort of move into better jurisdictions, if you like, lower risk jurisdictions such as Canada or Botswana, we will see a margin that would be in between our Australian margins and I guess our West Africa margins. We'll see some change due to blending in the portfolio and the weighting in the portfolio. As for the Australian operations, look, we've got a stable team. We've got long-term operational experience with the mines that we're at. We do expect to see those margins improve as the operating conditions around supply and labor improve into hopefully the near-term future. We expect the West Africa margins to remain stable. We see upside as the conditions improve.
Great. Just on, you know, Sakari and some of the asset sales and things like that, are there other opportunities in West Africa, you know, I guess for some of these sales or, you know, moving to, you know, an owner-operator model, or was Sakari more just like a one-off at the moment?
If we think about Yanfolila, we did in the previous financial year about exiting that project, asset sales now in Sakari. We are looking at our broader strategy as we've outlined today and previously. We look at opportunities that make sense to recycle capital into areas that support the ongoing strategy. I wouldn't say it's a one-off, Andrew, but we will be quite selective and focus on what makes sense for our shareholders with our move and also ensure we support our customers through any transition they may occur.
Great. That's it for me. Thanks.
Thanks, Andrew.
Thank you. Your next question comes from Nicholas Rawlinson from Jefferies. Please go ahead.
Hi, guys. Can you hear me?
Yes. Yep. Yeah.
Sorry about that before. Thanks for my information. Just on the border issue, can you give us an update on how COVID impacted your operations on this quarter and the outlook for 2H and maybe split those for both surface and underground?
Nicholas, really hard to hear you, mate. I picked up the first part, which I think was around COVID and the impact of operations, but I missed the second part. You please repeat?
The impact of COVID on your operations this quarter and the outlook for 2H, maybe split into both surface and underground.
Sure. Okay. I assume, if you're talking about this quarter, you're talking January, February, March. I guess to date, we've continued to see the same sort of challenges that we had in the first half. Obviously the signs are sort of more positive with the Western Australian borders opening, and we're hopeful that supply chain starts improving. The impact between Australia and offshore is very different in terms of how that plays out. But in terms of how the team are going, we're still on track for what we've called out in this presentation and previously for our full- year guidance. We are seeing the improvements flow through as we had anticipated, hence maintaining guidance.
Thanks for that. Just on the growth projects, would you mind giving us an update, whether they've all been mobilized, ramped up, et cetera, recently?
Sorry, Nicholas, can you repeat that again, please? There's a bit of background noise.
Just on the growth projects, would you mind giving us an update on whether they've all been mobilized and ramped up, et cetera?
Yeah, sure. I'll start with the growth projects in Botswana. Firstly, Zone 5, which we've been operating for some time and a very significant scale project. That ramp up continues. There was impacts in the half just gone regarding COVID challenges as the other COVID variants changed conditions, but the team continued progress and progressed that well. We also allocated some of our team that came out of Sakari down to Zone 5 to support the ongoing ramp up of that project. That's continuing well. The other project in Botswana is the surface project, Motheo. The team commenced mobilization and early works at Motheo in the half, and they're ramping that up as we speak.
They're on track for mining into this second half or mining operations beyond just the initial prelim work. The team, in terms of the leadership team, we've had our in-country operations manager employed for some time, and through previous contacts, we have the management team in place for Motheo. Feeling very positive about that. The team in place, the gear in place, now in work. That's continuing. If I move across to Canada, we saw improvements, increase in Red Chris mine with Newcrest during the half, and that ramp up is continuing. That's progressing well. Then the other project that we started in the half at [audio distortion] Iduapriem in Ghana for AngloGold Ashanti, and that ramp up is also progressing well.
In short, Nicholas, ramp up projects on track.
Thanks for that. Sorry if this was asked before, but the top-end revenue guidance looks pretty achievable with the growth projects coming through. What are you expecting for margins in underground in the group generally? Just trying to understand the moving parts that need to happen for you to hit your operating cash flow.
Yeah. In terms of the revenue guidance, and then I'll go to the EBITDA guidance, clearly we've been generating AUD 1.2 billion in the first half. We are confident about the second- half revenue guidance. We have maintained our EBITDA range for the full year. That will require a step up in the second half as we've called out previously. We're confident of that, and part of that step up is the growth projects. In addition, we are also factoring in seeing a slight uptick in percentage margins as well. The only caveat that I'd put on all of that, Nicholas, is around the broader macro environment.
While we've seen positive signs coming through regarding borders, et cetera, I guess what the last two years has shown us is that COVID can throw up a little challenges. There's still that uncertainty that exists globally, hence why we've maintained the range for EBIT that reflected the revenue growth. We see some improvements coming through in margins in the second half.
That's it from me. Thanks very much.
Thanks, Nicholas. Thank you.
Once again, if you wish to ask a question, please press star one on the telephone and wait for your name to be announced. We will just pause momentarily for questions to register. There are no further questions at this time. I'll now hand back to Mr. Norwell for closing remarks.
Thank you. Firstly, thank you for taking the time to join the Perenti results call. As everyone is aware, the market conditions have been challenging. For a global business, I'm extremely proud that our team's been able to deliver record revenue, EBITDA in line with our guidance, and continue to progress key strategic initiatives. While we still have some macro challenges to navigate, once these challenges start to ease globally with our record revenue, we will see additional margin pull through, along with contribution from our new projects. We've had our fair share of challenges over the last three years, but in short, we continue to deliver now. We are positioned for the near- term strong performance as conditions improve, and we continue to focus on and invest in our long-term future. Thank you again, and have a good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.