Good interview Andrew - unlike @edgescape I've been lucky enough to have bought EGL in my largest real money portfolio just after Jason and Paul came over to help run the company - in fact just after Jason's first interview on/with @Strawman here a couple of years ago, and I added them to my Strawman scorecard (virtual portfolio) around the same time so you can get a sense of how that's panned out for me by clicking on "Show Trades" to the right of EGL on my scorecard. Currently it's +43.5% p.a. (@ 29 cps) - and that's because I started buying at 15 cents, trimmed the position when they got up to 34 cents/share in early 2022, and then topped up at 20 cents when they fell back down to that level in mid-2023. Buy low, trim high, keep a core position. Not trying to crow about it but it's a simple philosophy and it doesn't work out well all of the time, but when it does, it's... nice!

I agree with Jason that (a) they've achieved a lot in the past couple of years, and (b) the outstanding growth we've seen, particularly in the margins (the bottom line growth that he's so focused on) is going to be exceeded in the next few years because these past couple of years have been all about setting up the business for future growth, by:

1. Rationalising work, with a focus on profitability, so no tendering for jobs that don't make money, and no tenders at prices that don't reflect both the right (acceptable) margins and the world class IP that the customer is buying access to;
2. As alluded to in (1) above, pricing world class IP accordingly, so by all means make the best stuff you can guys, but charge properly for it because the customer is allowed to pay for the intellectual property that comes with the products and the engineering solutions;
3. Partnering with world-class companies by getting them to or allowing them to grant EGL the rights to sales, distribution and servicing of their (that world class company's) products here in Australia, and so far all three of those agreements (Turmec, Kadant PAAL and Fulton) have come at zero cost to EGL as Jason pointed out ("not one red cent" in intial outlay) and can be done with their existing workforce; and
4. Focusing on what they are good at (sticking to their knitting), not charging off into new areas where they have limited experience, however while doing that (sticking to what they know), also focus strongly on: (a) Higher Margin Recurring Revenue (now over 52% to 54% of their entire revenue) so get new customers on servicing agreements with all new products sold wherever possible; and (b) always look for and take full advantage of cross-selling opportunities across their divisions.

The highlights for me - apart from Jason being consistent in his messaging around those 4 points above - included Jason's intent to grow the business in terms of having plenty to be going on with - with what they have now - without any need to go out and make any expensive acquisitions, be they bolt-ons or transformative (the worst kind).

What struck me when I first heard Jason speak a few years back and then did further research into the history of Tox Free and what Jason and Paul had done with that business (i.e. what I included in my IT - Investment Thesis - before I first bought EGL shares), was: These were smart operators who knew a lot about waste management, had a proven track record in that industry of growing a business at a decent clip and making money for their (TOX) shareholders, who had been given the Turmec agency on the back of that, and who had seen a business in EGL which was not in good shape but a business that they could turn around and really grow - because it had good assets, some great IP, some great people (particularly clever engineers and competent boiler technicians for instance), some good reputations in some of their divisions such as Tomlinson (now EGL Energy) which I'd been following since the RCR Tomlinson days - Tomlinson was consistently profitable for RCR and EGL picked it up for a song from the RCR Administrators because of how much debt RCR had racked up by driving RCR into solar farm construction by undercutting all of the incumbent players and losing heaps of money on a number of those solar farms, especially when penalties and completion bonds were called in after RCR ran into trouble and couldn't pay their own contractors, some of whom were not even licenced electricians - but we're not getting into that saga again here! - and I was prepared to back that management team (Jason Dixon and Paul Gaskett in particular) on the basis that they had the prior track record, that Jason was on a modest salary with plenty of skin in the game in terms of EGL shares, and I was confident that they would run EGL like business owners, not just as hired managers (Paul was their National Sales Manager and his title is now their Chief Commercial Officer, Jason is their CEO) - see here: Executive Team - The Environmental Group Limited

Mrs Brenda Borghouts, EGL's COO (Chief Operations Officer) since Feb 2022 also has some excellent experience - a defence veteran, having 20 years of experience in logistics and operations and more than 5 years as a consultant with Pricewaterhouse Coopers, delivering cross-government department programmes of work and supply chain solutions, Mrs. Borghouts has extensive experience managing global operations for engineering design and heavy metal fabrication operations for mining and energy customers, with teams based around the globe. 

As Jason mentioned today when discussing the tendering process, every tender has to be run by Brenda and get her approval; her bio describes how she is responsible for the integration of new acquisitions (they've made just one so far, Airtight Solutions, in April 2023), and how developing a sustainable supply chain through proactive engagement across the existing and new supplier bases, and working closely with teams on project execution, are of primary focus for Brenda. Her background with the Australian Defence Department, with PwC, with delivering cross-government department programmes and of course her mining and energy industry experience managing global operations in the fields of engineering design and heavy metal fabrication operations would no doubt be applicable and helpful to EGL. Jason talked today about where a lot of PFAS contamination ends up, however in terms of contaminated land, some of the worst contamination has been on Air Force bases where repeated fire drills and training using PFAS to fight fires including aviation fuel fires has occurred. Metropolitan (city) firefighter training facilities is another one, although those are not connected to the Defence Force like the Air Force Base contamination is.

But, again, I consider the PFAS division (EGL Water) to be a potential future revenue stream, and my IT is based on their other divisions that are not waiting for approvals, procedure development and commercial acceptance (which EGL Water's PFAS removal technology still is).

But my point is that Jason stressed more than once today that the past couple of years of excellent results with this business is not him, it's the team, he's just the spokesperson for the team, although don't be fooled, it would NOT have happened without him, so perhaps, more accurately, it's not just him, there is a team, and Brenda isn't ex-TOX like Jason and Paul are (and one of the NEDs on their Board is also ex-TOX, Michael Constable was CFO of Tox Free Solutions Ltd. for over 10 years before its sale to Cleanaway for around $680m in December 2017 to January 2018 and has also worked for Millennium Services Group [4 yrs], Nylex and Programmed Group) but my point is that Brenda Borghouts, EGL's COO is NOT ex-TOX but still has heaps of applicable experience and is clearly doing a great job as well, so it's not just about the TOX connections, it's a solid team there and they're clearly all on the same page - singing from the same song sheet - and other applicable metaphors - so still very happy to continue to back EGL's management.

So while I haven't yet paid more than 20 cents per share for EGL and they closed today at 29 cps (+45% higher than my highest price paid), it wouldn't be hard to argue that there is still plenty of value there even when buying at current levels. I don't know if EGL is the very best opportunity in the market at this point in time and at this price, but it's in my top 20, so I hold them. Actually they would be in my top 10, and I would also hold them in my SMSF if they were in the ASX300 - which is a requirement for inclusion in that portfolio (it's within an industry super fund). My other (larger) portfolio does not have that restriction, so they're in that one. And I hold them here of course. Nothing at all that concerns me about or from today's interview/discussion - glad to hear you're finally jumping on this one too @Strawman - about time!!

I'm somewhat behind the 8-ball on this one - still viewing the 2023 meeting! However, I am really struck by the strategic clarity of this one. As a chemical engineer by profession (originally), I can see how the core competencies of this firm play across each of the business segments.

Jason is positioning the business really well for the Australian market over the next decade:

• Landfill to recycling transition
• Gas mid-merit to Gas-peaking change in the energy transition
• Made-in-Australia push likely to drive more mineral processing in critical minerals
• Upside of PFAS ... keen to listen to the latest meeting to hear where we are up to on that

In addition, the spares and services revenue streams will help smooth out the lumpiness of project revenues, and should contribute to justifying a higher multiple.

Keen to do further research. On a fwd p/e of 22 (assuming FY24 eps of 1.3 cps) I am happy for now to keep it on the watch list, as I am early in my learning process on this one.

@Bear77 Grosser was relatively quick on buying and then putting out his thesis which made me suspicious. Plus the previous management never was able to drive the business so I thought most of the ideas were just duds. They were the main reasons for not going in on the change in management.

But it appears Dixon is having a decent go from what you said.

Tbf, I was the one that wrote it up at the time when I was with Cap H. We bought "quick" as we were offered a line post FY21 results after spending months researching and following the stock post Jason's appointment. We were also incrementally buying after that including around when our initial note went out. The notes on the company had been done with some regularity since too. Idk what is supposedly so suspicious.

I don't know. Maybe I took this off my watchlist too quick after my sale and seeing the share price fall even more. So I lost track of it therefore it looked quick. Can't remember now. Past is the past and we should not dwell on it.

So, I finally caught up with the latest $EGL SM meeting.

I agree with @Strawman in that I am also really impressed with the CEO. Not only does he have a clear vision and has positioned the company into a multi-decadal tailwinds as Australia (and much of the region) finally starts pricing the externalities of emissions and waste, but he is also highly commercially-focused, with a clear eye on growing the bottom line.

As evidence of his commercial focus, I like how he described the 2-3 fold increase in segment margins that's been achieved by focusing on spares and services, in businesses that were previously focused on the capital project phase. With 54% of revenue that's essentially recurring, that's quite an achievement. (And it will command a higher multiple over time, so I need to think about that in my valuation.)

He confirmed on the second meeting how they leverage the core technical capabilities across the business segments, something which I inferred from the first meeting, but it was good to hear the words come out of his mouth this second time around. That's a big plus, as it gives them operational flexibility as the fortunes of different segments ebb and flow from period to period. This is one of the big challenges in engineering firms.

I like his story about how they get the new engineers in to train them about margins. That indicates to me that they will drive the culture strongly into the business. And with only a few hundred people, that's something that an aligned leadership team can do very effectively, and is a huge asset.

I also liked his clarity of making sure that they are market leaders in each segment - "the LVHM of the industrial waste sector" as a way of describing the kinds of partnerships they will form.

Of all the small cap CEOs I think we've seen here, Jason appears to have the complete tool kit, deeply grounded in the core capabilities of his business, but also clear on the overall levers being pulled. Unlike some other CEOs, when he talks about acquisitions, you can hear the capital discipline and his eye on not diluting or "blowing up" his own holding, and having to explain that to his wife!

So why haven't I invested yet? After all we've had members like @SleepEasy and @Bear77 highlighting the merits of $EGL for years. The answer is that I was always uneasy about the exposure to combustion waste streams, and how these would be impacted by the energy transition, and the electrification of the economy. I do understand the role of their technology in the transition of gas turbines from combined cycle to peaking, but I always thought they were focused on brownfields, and that increasingly the economics would favour generators investing in the latest generation of greenfield peakers that would come with their own OEM packages. What I heard Jason say is that these new greenfield peakers will also be able to use their technoology. So, I want to do some further due diligence on that, as well as have a look at the outlook in the latest AEMO Statement of Opportunities.

Again, Jason scores well here on his awareness of the energy transition, as evidenced by his discussion about the importance of the Fulton Hybrid boilers, and the wider discussion at that point in the interview.

I'm still uncertain about how long the conversion to gas peaking will run. Grid scale batteries are also continuing to build momentum, with various technologies (in addition to lithium) still early on the learning curve.

So, I've just picked out some of the things that impressed me. There is just so much substance to this story, and its been worthwhile to listen to the two SM interviews almost back to back.

I've not buying today. I'd like to see if I can get a better price. But actually, I need to take a look at my RL portfolio and review the merit order, as someone needs to make way for $EGL.

I'm pretty confident that this is a business with fantastic long term growth propsects, so its not something I have to action today. But for sure, this one is high on the watch list. Well done to those who saw the opportunity early on, and tried to share it with us all!!

Disc: Not held

Agree with everyone, another great interview @Strawman! Thanks for setting it up.

I have looked at EGL many times as it is a stock I would like to own, it has the characteristics of other micro/small caps in the broader industrial space that I own and have done very well on (LBL, XRF, VYS, etc) but the main hurdle I have struggled to overcome is the lumpy free cash flow. Since FY21 (like others I think it is fair to look at EGL from a before Jason/after Jason point of view!) the business has reported cumulative EBITDA of $17.6m while cumulative FCF has languished at -$100k.

That big discrepancy comes from the fact before Jason the business did not report a work in progress balance, resulting in very lumpy reporting periods as the P&L was tied to invoicing at project payments. Using a WIP balance smooths out that lumpiness, but in effects means bringing forward recognised revenue before cash is received, resulting in a natural lag. Going from zero WIP to $8.1m at the last report is the biggest reason for the cashflow gap. On top of that, steadily increasing lease payments and some capitalisation of intangibles are the other contributors.

To play devil's advocate on myself, it was the 1H24 result which really made the gap ugly after two years of steady growth in cashflow, and Jason wrote in the report that the recent Airtight acquisition required an injection of working capital so we should see it normalise in the 2H24. Hopefully a strong 2H for cash collections will clean up the chart below, until then like @mikebrisy the valuation is a touch too steep for me.

Excellent point @Wini, and something I had completely overlooked!

Will definitely make a note to revisit this after the next set of results.

@Wini great explanation, i asked that exact question of HG on the livewire article a few months back. that explains it. Luke.

someone appears to be sitting mid 20s accumulating this one, wish they would have a few days off

So this afternoon I did some long overdue research on the outlook for gas in Australia, prompted by the $EGL SM Meeting with CEO Jason.

TLDR

My conclusion is that I am now less concerned about a declining potential for $EGL's opportunity in gas over the next 20 years than I had allowed to develop in my mind. (I have one research question still to answer: can they compete for equipping greenfield gas peakers, which Jason said they can, but I'm not so sure.)

The Details

The picture below is from the electricity market operator, AEMO, 2024 Statement of Opportunities, shows gas in the NEM (i.e. Eastern Australia and North Territory .... sorry WA). In this scenario we achieve 2030 carbon emission reductions of 43% and 2050 Net Zero (i.e., current governement policy). Its one of three major market evolution scenarios, that is updated periodically by the Regualtor and Market Operator.

First, ignore the big purple bit on top. That's the gas we export as LNG. Still a big earner for Australia, even in 2043! What's interesting for $EGL is the crimson bit and the green bit.

What it shows is that gas into electricity declines progressively from now to 2031 - that's the continuation of the process Jason talked about at the meeting, whereby there is so much solar and wind that the gas plants need run for fewer and fewer hours. They are still needed, they just don't run so long because they're needed less often (night time, days without wind, high electricity demand hours) and only for a few hours or even less. That's what driving the conversion of combined cycle gas turbines to gas peaking plants, where $EGL gets opportunities to provide the silencers and exhaust kit.

What's interesting (and news to me, because its about 5 years since I took a close look at this market), is that gas-into-electricity generation starts to grow again from 2033 onwards. That will mainly be greenfield gas peakers, I expect.

The other thing I can see here, is that there is a solid ongoing demand of gas into the industrial sector (green). That will include where gas is used as a feedstock (fertilisers, chemicals) as well as a boiler fuel for process steam and heat. It shows a modest decline because of the electrification of some of the industrial plant, like the Fulton hybrid boilers Jason spoke about.

My remaining question relates to the greenfield gas peakers. Who can provide these?

So, today I wrote to CS Energy, and asked if they've made all the procurement decisions for their greenfield 400MW Brigalow Peaking Power Plant, due onstream in 2026. As you'll see from the picture, it has 12 GE turbines, each with a silencer and exhaust stack - I these are a bit smaller than the 300 tonne ones Jason was talking about. But still, a fair amount of investment. My question is whether these are provided as part of an integrated package by GE, or whether they would be contracted or subcontracted locally - creating opportunities for the likes of $EGL. [As their owner (i.e. a QLD voter) I expect an answer, but if not, I will bother some of my former colleagues in the electricity market.]

Now I know the AEMO projectioons are just one scenario, and there are others with both more and less gas demand. But it is the basis upon which invenstment in the industry is being planned, so its the best we've got. Other outcomes are possible. For example, in terms of grid support and responsiveness, 6-hour and 8-hour batteries provide equivalent grid support to gas. (see below one example in the graph below, as it depends on location in the market.) What this means, is that in a world where the economics of batteries continues to improve AND we get more and more concerned about getting cooked (+2 degrees, +2.5 degrees, +3 degrees ...), policy could turn harder against gas and encourage battery facilities to provide more and more of the peaking support. So, fewer new gas peakers needed after 2030.

Ok, so that's my deep dive on gas. And feeling more relaxed about that component of $EGL's strategy.

Another reason to feel good, is that the wider perception around the gas sector means we might be unlikely to see many new entrants. All the hot money is headed in the direction of wind, solar, batteries, pumped hydro. So perhaps $EGL will enjoy a good level of market concentration. Good for margins!!

Disc: In a former life I used to be Head of Strategy of a global gas company, and this sort of work used to be my day job, and is the source of my investment capital. So cheers to that!

I think the cashflow chart from @Wini goes back to my point on what happened in the past that it was a lot of effort to make the business work.

@BkrDzn Probably wary is more the correct term not suspicious. It's always human nature to question intentions of a thesis especially as a previous holder who saw the negative.

I'm still thinking whether to make room for this but I think this is better risk reward than other "green" stocks out there such as Calix which at 265m while being silent on some of their projects is still expensive compared to EGL.

Somebody is buying EGL - it is fairly illiquid so it doesn't take much to move the share price, but on a day like today...

With every sector in the red and 19 of the top 20 companies on the ASX losing ground:

...EGL was one of the few heading the other way - up +5% !

Chart data from Commsec, other bar graph data from MarcusToday.com.au

Other companies holding up against a falling tide today included LYL & LBL (both flat), DUR (+1c), XRF (+3c/+2.27%) and NWH (NRW Holdings, +8c/+2.83%), so good quality microcap industrials and mining/engineering services held up, or some within those sectors did anyway. Those were the best of the ones I hold, along with AD8, and two of my goldies were also in the green (NST & BGL), but not by much. So there's still some buying going on at the smaller end, even when it looks like everything is being sold off.

Happy Weekend all. I've just tested positive for Covid again. Mild symptoms, but can't smell much, unlike our friend above.

Is it coincidence that Jason Dixon just spoke to us here and the share price is headed North?

Could it be one of us doing the buying? Mmmm....

Covid! No @Bear77

Time to bunker down solo and work on the stocks.

Hope you shake it off quick.

Stocks exposed to the energy transition (ie: gas transition from coal as opposed to direct renewable) appear to be doing well which probably includes EGL.

I noticed a small cap I hold that are concentrating on some energy transition projects have done quite well too which is a surprise.

Seems to be a bit of luck finding the best one though.