AUSTIN ENGINEERING LIMITED — Annual Report 2017

Aug 30, 2017

Austin Engineering Ltd Financial Year 2017 Results Presentation

Contents

	Page
1	Summary 3
2	FY17 results 5
3	Strategy and safety 14
4	Outlook 18
5	Appendix: Austin operations, products and services 20

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1. Summary

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Summary

Improving industry conditions

Improved products and services

Growing profitability

Refinance of Australian debt underway

Positive outlook

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• The major commodity markets are progressively improving, with clients re-investing in replacement of large mining fleet components.

• Ongoing improvements in engineering and design have resulted in enhanced products and services that deliver increased productivity and lower operating costs.

• Normalised EBITDA substantially increased from breakeven in the first half of the year (1H17) to $14.3 million in the second half of the year (2H17).

• Credit approved letters of offer received for new facilities to repay the Australian senior debt.

• The current order book and committed work represents 81% of 1H18 Budget revenue.

• Guidance for 1H18 normalised EBITDA is in the range of $10 to $12 million.

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2. FY17 results

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Financial performance

Normalised results($'m)	FY16	1H17	2H17	FY17
Revenue	188.2	91.0	143.3	234.3
Growth			57.6%	24.5%
Gross profit	56.3	27.7	43.6	71.3
Gross margin	29.9%	30.4%	30.4%	30.4%
EBITDA	7.1	-	14.3	14.3
EBITDA margin	3.8%	0.0%	10.0%	6.1%
EBIT	(4.0)	(5.6)	8.7	3.1
EBIT margin	(2.1)%	(6.2)%	6.1%	1.3%

FY17 Revenue and profitability

Trading:

• After difficult industry conditions in FY16 and 1H17, Austin has traded strongly in 2H17.

• Revenue of $234.3 million has increased by 24.5% in comparison to FY16.

• Normalised EBITDA increased from $7.1 million in FY16 to $14.3 million in FY17 (at the higher end of the guidance issued in February 2017).

• All of the normalised FY17 EBITDA was achieved in 2H17 (1H17 was breakeven).

• This improvement in both revenue and normalised EBITDA was achieved due to a combination of:

• increasing sales volume of fabricated products

• improved profitability resulting from the change in product mix

• increased fixed cost recovery across higher revenue generation

• continued focus on cost reduction.

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Financial performance

Statutory results($'m)	FY16	1H17	2H17	FY17
Revenue	188.2	91.0	143.3	234.3
Growth			57.6%	24.5%
Gross profit	56.3	27.7	43.6	71.3
Gross margin	29.9%	30.4%	30.4%	30.4%
Impairment and one-offs	(27.7)	0.4	(22.4)	(22.0)
EBITDA	(20.6)	0.4	(8.1)	(7.7)
Depreciation and amortisation	(11.1)	(5.6)	(5.6)	(11.2)
EBIT	(31.7)	(5.2)	(13.7)	(18.9)
Net interest expense	(6.2)	(3.8)	(2.3)	(6.1)
PBT	(37.9)	(9.0)	(16.0)	(25.0)
Tax	7.9	3.3	(5.9)	(2.6)
NPAT	(30.0)	(5.7)	(21.9)	(27.6)

FY17 Statutory results

Asset impairment:

• Impairment charges ($19.2 million) were applied to Chile, Australian Site Services and Aust Bore as a result of FY17 performance negatively impacting on their outlook and carrying value.

• In addition, the carrying values of properties were reduced following external valuations ($0.6m), including ($3.4m) in Australia, partially set off by a reversal of a prior year impairment in Indonesia of $2.8m.

Impairment and one-offs ($'m)	FY17
Impairment to intangible assets:
– Australia	(9.0)
– South America	(10.2)
Impairment to property	(0.6)
Other one off costs	(2.2)
Total	(22.0)

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Diversified revenue

FY17 Revenue by region

1

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7%
48%
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2 FY17 Revenue by commodity

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Australia
Americas
Asia
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Iron Ore
Coal
Copper
Gold
Other
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3 FY17 Revenue by customer type

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4% [3%]
58%
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Miners
Mining
contractors
OEM's
Other
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4 FY17 Revenue by product and service

Maintenance /Repairs Tray bodies Crane Rental Buckets Other

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Working capital and capital expenditure

FY17 Working capital growth ($’m)

FY17 Capital expenditure ($’m)

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100.0
6.0
80.0
60.0 5.0
5.2
40.0
4.0
20.0
-
3.0
(20.0)
(40.0)
2.0
(60.0)
1.6
(80.0) 1.0
30 June 2016 30 June 2017
Payables (36.5) (55.7)
Inventory 15.8 31.6 0.0
Receivables 29.4 45.3 1H17 2H17
Net working capital 8.7 21.2
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• Whilst Austin has focused on working capital efficiency, investment in working capital has been required to support the increased sales volumes in 2H17.

• FY17 capital expenditure focused on necessary maintenance and immediate growth opportunities.

• Increased capital expenditure in 2H17 includes $1.8 milion for two cranes acquired under finance lease by Chile to service a long-term contract.

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Cash flow and net debt

Cash flow ($'m)	1H17	2H17	FY17	FY17
Cash flows from operating activities
NPAT	(5.7)	(21.9)	(27.6)
Add: depreciation and amortisation	5.6	5.6	11.2
Add: Impairment	0.0	19.8	19.8
Movement in working capital	(3.3)	(11.1)	(14.4)
Other movements	(8.9)	5.1	(3.8)
Cash used in operations	(12.3)	(2.5)	(14.8)

Cash flows from investing activities

Proceeds from sale of PPE	9.0	0.4	9.4
Purchase of PPE	(1.6)	(5.2)	(6.8)
Cash from investing activities	7.4	(4.8)	2.6
Cash flows from financing activities
Proceeds from issues of shares	8.0	-	8.0
Net repayment of borrowings	(6.6)	2.0	(4.6)
Cashprovided by financing	1.4	2.0	3.4
Net cash flows	(3.5)	(5.3)	(8.8)

Net debt ($’m)	30 June 2017
LIM term loan	20.1
Australian working capital facility	7.3
Other facilities	22.1
Utilised facilities	49.5
Less cash	(3.9)
Net debt	45.6
Unutilised facilities	6.8

• The LIM term loan of $20.1 million is due for repayment in July 2018.

• Discussions are progressing with financiers on replacement facilities that in combination will repay LIM and other non-bank loans in Australia.

• The facilities are credit approved, and completion of the refinance is subject to agreement of legal documents and satisfaction of conditions precedent.

• Investment in working capital ($14.4 million) and capital expenditure ($6.8 million) contribute to the net cash outflow.

• Other movements ($3.8 million) relate to provisions, including the settlement of the Brisbane operations lease.

• Proceeds from sale of $9.4 million mainly relate to the sale of Peru land and a large crane in Chile.

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FY17 by region

Australia Brisbane Perth Mackay Hunter Valley

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	Australia ($'m) Revenue EBITDA (normalised) EBITDA margin	FY16 92.2 1.5 1.6%	FY17 104.6 9.5 9.1%			Iron Ore Coal Copper Gold Other

Operations:

• Perth operations delivered improved earnings in FY17, as major mining companies in the region commenced a reinvestment phase in replacement components for mining fleets.

• Sales increased from engineering advancements enabling clients to take advantage of material payload increases and unit cost reductions across their fleets.

• Mackay operations continue to face challenging conditions, impacted by recent cyclones and road closures.

• Aust Bore machining business performed well as a result of client diversification strategies.

• Market conditions in NSW coal improved during the year and provided strong revenues for Hunter Valley operations, although high labour costs impacted on profitability in this region.

Site services:

• The Australian site service business is operating in a highly competitive environment and experienced some margin contraction.

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FY17 by region

Americas North America Colombia Chile Peru

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	Americas ($'m) Revenue EBITDA (normalised) EBITDA margin	FY16 89.7 5.3 5.9%	FY17 112.3 3.1 2.8%			Iron Ore Coal Copper Gold Other

North America:

• Activity levels were subdued for the majority of the year, with improvement in the final quarter. North America finished FY17 with a strong order book that included its largest ever order for truck bodies, to be delivered in 1H18.

Colombia:

• Colombia’s performance improved markedly from recent years with increased revenues from higher margin manufactured products. Historic revenues have been predominantly from repair and maintenance contracts.

Chile:

• The copper market was subdued for the majority of the year, and is now showing improvement. Despite this Chile increased sales of bodies and buckets, as well as repair and maintenance work.

• Trading volumes and profitability of the crane business were lower than in recent years. Chile’s overall cost base has been reduced and remains under review to improve future profitability.

Peru:

• The market in Peru continues to be challenging with local miners focused on equipment repairs and maintenance in preference to component replacement.

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FY17 by region

Asia Indonesia

	Asia ($'m)	FY16	FY17					Iron Ore
	Revenue EBITDA (normalised) EBITDA margin	6.3 0.3 4.8%	17.4 1.7 9.8%					Coal Copper

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Operations:

• Performance significantly improved in 2H17 as a result of higher utilisation of facilities.

• Utilisation increased as Austin leveraged its highly competitive cost structure and geographic location to win fabrication work for both Austin products and nonAustin products (including large modular structures and underground mining chutes).

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3. Strategy and safety

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Strengths

Market leading position

• Large global producer of custom truck bodies and buckets.

• Strategically located across four continents including Australia, Asia and the Americas, with scope to use subcontractors in other regions.

Attractive fundamentals

• Improving conditions in commodity markets.

• Product sales have improved as the investment cycle turns.

Strategic focus

• Business repositioned as an engineering solutions provider supported by product manufacturing.

Manufacturing excellence

• IP and engineering excellence built up over more than 30 years of experience.

• Fabrication workshops fitted out for safe and efficient manufacturing.

Visibility over orders

• High visibility over orders for the next six months.

• Recurring revenue from repairs and maintenance contracts.

Diversified revenue base

• Long term relationships with key customers across Austin’s various geographies/products/commodities.

• Key contracts with leading miners, contractors and OEMs.

Products

• Range of mining products and services tailored to specific site conditions, that deliver increased productivity and lower operating costs.

• Improved product designs are equally suitable for installation onto new and existing equipment.

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Strategy

	To be the largest supplier of truck bodies and buckets globally • Focus on re-orienting the business to provide clients with engineering solutions combined with high quality and efficient manufacturing capability. • Restructure of engineering centres to form one global engineering operation. • Increased focus on R&D and new, innovative products. • Strengthen existing relationships with original equipment manufacturers (OEMs) and large global mining clients.
	Grow and diversify the business through identified opportunities unique to Austin • Leverage Austin’s product IP to expand existing and enter new markets. • Develop stronger relationships with dealers and OEMs, utilising the integrated sales function to provide better customer coverage and foster relationships. • Grow approved sub-contractor base to provide additional revenue through flexible manufacturing capacity and production facilities where Austin does not currently have an existing footprint. • Pursue work in complementary industries utilising existing manufacturing facilities.
	Maintain cost competitiveness • Best practice operational performance and continuous improvement to manufacturing processes. • Remain at the cutting edge of engineering design, with fast, cost efficient techniques used to manufacture high quality products. • Continuous evaluation of global supply chain for savings through group wide supply agreements. • Grow the approved sub-contractor base to improve margin and reduce capital expenditure requirements.

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Safety

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FY17 Safety statistics
2,500 12
10
2,000
8
1,500
6
1,000
4
500
2
0 0
Headcount Average hours per day
35
30
25
20
15
10
5
0
TRIFR LTIFR
FY15 FY16 FY17
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Summary

Statistics:

• Headcount has increased from 1,772 at 30 June 2016 to 2,174 at 30 June 2017.

• Improved fatigue management has been achieved without materially impacting on the average man hours per employee per day.

• This has resulted in decreased Total Reportable Incident Frequency Rate (TRIFR)

• Lost Time Injury Frequency Rate (LTIFR) has increased, partially due to improved monitoring and reporting standards.

• The LTIFR is below the average for the heavy manufacturing industry.

Incidents:

• Despite continued focus on safety, regrettably there were two fatalities in Chile.

• Austin’s Enterprise Risk Manager and Global Safety Manager are actively reviewing and managing risk and safety across the group.

• This includes strict reinforcement of safe operating procedures for lifting equipment across all of Austin’s operations.

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4. Outlook

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Outlook

Revenue pipeline

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+100%
+80%
+60%
+40%
+20%
-
2H17 1H18
Committed work Other forecast revenue Actual
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• 2H17 guidance (February 2017) included order book and committed work representing 72% of the 2H17 forecast revenue.

• Actual revenue was 102% of the 2H17 forecast.

• Austin currently has order book and committed work representing 81% of the 1H18 Budget revenue.

1H18 EBITDA outlook ($’m)

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16
14
12
10
8
6
4
2
-
2H17 1H18
Actual Outlook
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• Based on the current order book and committed work, estimated normalised EBITDA for 1H18 is in the range of $10 to $12 million.

• Whilst orders may be delayed or amended depending on a number of factors including the terms agreed with customers, the strong pipeline gives greater confidence regarding this 1H18 estimated outlook.

• Austin needs to continue to carefully manage its manufacturing costs such as labour and materials (including steel).

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5. Appendix: Austin operations, products and services

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Operations

• Located in the east and west coast, providing an array of manufacturing, repair and support services.

• Perth is the largest workshop in Australia.

• Australia • Mackay and Hunter Valley are focussed on body/bucket repairs and maintenance.

• Brisbane Perth • Austin Site Services supports customers with on and off-site repair and maintenance

• Mackay services across Australia.

• Hunter Valley • Aust Bore offer specialised machining services, overhaul of track frames and other mining equipment, as well as mobile line-boring services.

• • The corporate office is located in Brisbane. • Located close to the port facilities in Batam, Indonesia, on one of the world’s busiest shipping routes only 20 kilometres away from Singapore.

• Asia • This fully equipped modern workshop manufactures both Austin products (including

• Indonesia bodies, buckets and water tanks) and non-Austin products (including large modular structures and underground mining chutes).

• • The North American facility provides manufacturing and engineering services to customers in North America, Central America and Europe. This facility is home to the

• Americas Westech brand. North America • Colombia is situated in Barranquilla, one of the main coal mining hubs of the country.

• Colombia Chile • Chile has two workshops strategically located close to customers where heavy

• Peru equipment lifting, transportation and site services are offered.

• The North American facility provides manufacturing and engineering services to customers in North America, Central America and Europe. This facility is home to the Westech brand.

• Colombia is situated in Barranquilla, one of the main coal mining hubs of the country.

• Peru has two workshops close to key copper mining regions.

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Products and services

Austin Engineering

Products

Services

• Leading designer and manufacturer of customised dump truck bodies, buckets and ancillary products used in the mining industry.

• Core competitive strength in engineering knowledge, experience and IP to design customised products that provide compelling productivity gains for clients.

• The ability to manufacture these products at its operations located in key mining regions around the world, or to use approved sub-contractors.

• A complete service provider, offering on and off-site repair and maintenance and heavy equipment lifting to customers including miners, mining contractors and original equipment manufacturers.

• Workshop based repair and maintenance services for mobile equipment and attachments, along with onsite asset management of equipment and fixed plant.

• Lifting and logistics support services in Chile through the Servigrut business, utilising a fleet of large tonnage mobile cranes.

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Disclaimer

This presentation has been prepared by Austin Engineering Limited (ABN 60 078 480 136) (“Austin” or the “Company”). The information in this presentation should be read in conjunction with Austin’s continuous disclosure announcements. The information is of a general nature and has been prepared by Austin in good faith and with due care but no representation, warranty or assurance, express or implied is given or made as to the fairness, accuracy, adequacy, completeness or reliability of any statements, estimates or opinions, conclusions or other information contained in this presentation.

You should also be aware that any forward looking statements in this presentation are subject to inherent risks and uncertainties. Those risks and uncertainties include factors and risks specific to the businesses of Austin as well as general economic conditions and conditions in the financial markets. Actual events or results may differ materially from the events or results expressed or implied in any forward looking statement and such deviations are both normal and to be expected. No relevant party makes any representation or warranty (either express or implied) as to the accuracy or likelihood of fulfilment of any forward-looking statement, or any events or results expressed or implied in any forward-looking statement, and you are cautioned not to place undue reliance on these statements. The forward-looking statements in this presentation reflect views held only as at the date of this presentation.

Subject to any continuing obligations under applicable law or any relevant ASX listing rules, Austin also disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statements in this presentation to reflect any change in expectations in relations to any forward-looking statements or any change in events, conditions, circumstances, expectations or assumptions on which any such statement is based. Nothing in this presentation shall under any circumstance create an implication that there has been no change in the affairs of Austin since the date of this presentation.

The information in this presentation does not constitute financial product advice (nor investment, tax, accounting or legal advice). Investors must not act on the basis of any matter contained in this presentation, but investors must rely on their own independent assessment, investigations and analysis of Austin. Investors should obtain their own professional, legal, tax, business and/or financial advisors before making any investment decision based on their investment objectives. Due care and attention should be undertaken when considering and analysing the financial performance of Austin.

All amounts are presented in Australian dollars unless otherwise stated.

This presentation includes certain terms or measures which are not reported under International Financial Reporting Standards (IFRS) including, but not limited to, ‘underlying’ and ‘normalised’. These measures are used internally by management to assess the performance of the business and make decisions about the allocation of resources. These non-IFRS measures have not been subject to audit or review. Refer to Austin’s FY17 Preliminary Final Report for financial information presented in according with IFRS standards.

Each recipient of this presentation or any entity or person receiving this document represents, warrants and confirms that it accepts the above conditions.

This presentation and the information contained in it does not constitute a prospectus or product disclosure statement, disclosure document or other offer document relating to Austin under Australian law or any other law. This presentation is not, and does not, constitute an offer, invitation or recommendation to subscribe for, or purchase, securities in Austin.

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