Adrad Holdings Limited (AHL) Earnings Call Transcript & Summary

Good afternoon, and welcome to Adrad Holdings Full Year FY '25 Results Webinar for the financial year ending 30 June 2025. Presenting today is Adrad's newly appointed CEO, Paul Proctor; and CFO, Roderick Hyslop. Today's format will begin with a run-through of the results presentation followed by a Q&A session. [Operator Instructions] I will now pass to Paul.

Welcome again. My name is Paul Proctor. And as Mel pointed out, I'm the newly appointed CEO of Adrad. You would all be aware that we have 2 major business segments, and we are in the engine cooling market. The Heat Transfer Solutions segment, which is where most of our manufacturing takes place, is a vertically integrated designer and manufacturer of industrial and automotive radiator and cooling solutions. And we have a strong brand and reputation in that business. And we also have a strong brand and reputation in the distribution business, which is an importer and distributor of radiators and a range of other products for the Australian automotive and industrial markets. Over to you, Rod, to talk about the financials.

Yes. Thank you. So I'll just do a quick update on the group financial highlights. I'll be elaborating a little bit more on this later on. But we're pleased to see revenue growth of approximately 8.9% up to $153 million. And through that, that drove operating cash flow of $13.9 million. And that's given the business confidence to be able to declare ultimately a final dividend of $0.0208 per share. And that brings our full year FY '25 related dividends up to $0.0348 per share. So it's about 18% up on the prior period or prior year and also represents 50% of statutory NPAT, which is a higher dividend than we have typically declared in prior years. So it's an indication of the confidence that management and Board have in the company. But I'll be touching on this a little bit more detail later on. So I'll hand it back to you, Paul.

Thank you, Rod. Regarding each segment's performance, HTS was the largest revenue growth, and that has been on the back of growing demand for backup generation for data centers. This is a key growth segment in the market. We have some excellent product offerings, and we see that as a real continued growth engine for that business. Distribution revenue has grown more slowly, but has certainly picked up strongly in the second half as we implemented new strategies regarding pricing and also we continue to expand our range. So here are some of the things that we've done to grow that sales revenue. We've appointed a new regional sales director for Asia, and we're seeing an uptick in the inquiry demand in that part of the market and also some early signs of conversion. Our Thai manufacturing facility layout continues to be optimized. It's not in its final state, but it's getting much closer. And again, we've continued that increased penetration into the data centers, and that's been a real growth engine of the HTS business. Switching over to the distribution business. We have managed to continue to grow our customer base, which is a key target for us. That's up 6.5% and the early signs are continued growth. And the exciting phase of the branch expansion has begun. We've identified our first rollout, and that's happening in FY '26. So that will also increase our geographical footprint.

So I will now provide you a quick update on the FY '25 financials for the year. So we touched earlier on the highlights, and I'll point out that the business and the company primarily focused on 3 key areas over the past 12 months being revenue growth and its associated cash generation, underlying EBITDA and NPAT. So group sales revenue was up approximately 9% over FY '24 with growth in both business units and in particular, within the HTS business unit, as Paul was alluding to. This segment witnessed increasing demand for our cooling solutions for the growing data center market, plus an uptick in our project work for the cooling of remote power gen facilities. So meeting the growing demand in these 2 markets required an increase in raw material inventories, which is a slight reversal in trend from prior years where we had substantially reduced inventories as we focused on stock turns. We will still, of course, continue to focus on stock turns, but we've had to increase raw materials and inventory to support the growing demands in the manufacturing business. The flow-on effect is that our operating cash conversion ratio at 79% this year is slightly down from FY '24, which was at 81%. But that was again largely impacted by the purchase of raw materials to support manufacturing in these critical areas. So operating cash flow has remained positive and supports the declaration of a final dividend, bringing the combined full year FY '25 dividend to $0.0348 per share, which is 50% of statutory NPAT. And as I said earlier, this marks a change from prior year norms where we had typically declared dividends up to 40% of stat NPAT. And the change reflects management's confidence in the company and its continuing ability to generate operating cash flows and pay dividends. Turning to underlying EBITDA. The annual result is approximately 3% lower than the prior year. Now for those of you who are engaged with us at the half year, we expressed confidence in delivering a stronger 2H FY '25, and we delivered. EBITDA improved from 10.5% at the half year to 12.5% of sales revenue in the second half, reflecting management's continued focus on initiatives, particularly around distribution pricing and material sourcing. Looking back, 1H was impacted by a weakening AUD and the inflationary pressures that increased the cost of our imported product and dented our margins. During the second half, there were beginnings of an improved exchange rate, renewed customer contracts that affected better margins, greater focus on distribution product pricing and concerted efforts to improve freight recovery and overall cost of freight, all contributing towards improving our EBITDA margin. The work in this area is not complete, and the company will continue to implement process efficiencies and better coordinate our procurement to maximize cost out. So this will be a key area for the company during FY '26. On the balance sheet, management considers the company's financial position to be robust. The company continued to increase cash from operations. The increase in contract assets reflects our growing data center work and the project work with an associated raw materials inventory increase to support this. We continue to invest capital to enhance production capabilities at our Thai facility as well as our Victorian facility. Paul mentioned that earlier, our Lara facility has now been able to start production of data center cooling units to keep up with the growing demand. And the Thai facility office block and the factory relay have now been completed. And the company will continue to assess its capital upgrade opportunities in the pursuit of manufacturing efficiencies and enhanced margins. On the cash flow, the company maintained a relatively consistent cash conversion ratio as compared to FY '24. We had lower tax payments during the year as we refined our effective tax payment rate, and this was offset by the increase in raw materials required for our project work. As a result, the $13.9 million in cash generated from operations flowed down into a net cash increase of $2.4 million or 15% increase on the FY '24 closing balance. This has provided the Board with the confidence to declare a $0.0208 per dividend share, again, bringing that up to 50% of statutory NPAT for the full year. The final dividend has a record date of 8th September and a payment date of 29 September. So in closing, it's management's assertion that the company has a sound financial position from which to progress the initiatives that Paul will bring during FY '26 aimed at improving our financial performance. And with that, Paul, I'll hand it back to you to provide an update on the company's outlook for the -- well, this current FY '26. Thank you.

Okay. Thank you, Rod. We're in the fortunate position to have a very strong outlook for FY '26. We've entered it with a strong order book, particularly in the industrial part of the business. We are strong in a product line that continues to grow, and this is a global issue that needs to be resolved and that we are at the half way of resolving and that is data center demand for cooling. We've grown our order book in Southeast Asia. And one of the key initiatives that even though I'm early into the role is quite obvious in this business is that we've got great opportunity to improve our cost and drive efficiencies. So that's our outlook during '26, continued strong sales growth and a stronger conversion into EBIT and cash flow. Thank you.

So Mel, that's the presentation for the day, and I understand that you are open to questions from the audience. So if there are any questions, we'd be happy to field them now.

Thanks, Rod. We haven't received any questions as yet. I might just give it a couple of seconds longer.

That's fine, Mel. Thank you. As you know, we will be doing our roadshow in early September. So a lot of the people on the call, we might be meeting with them individually or through small groups anyway. So there's an opportunity to have conversations in person in Sydney in early September and same in Melbourne. So if there are no questions now, we're more than happy to take any on notice and come back to you if people send questions to you after the fact and also...

Sorry, one question has come through on the R&D impairment. Could you explain what caused the $1.1 million R&D impairment?

Right. So our business engages in R&D and development of assets that can be used to build different cooling apparatus for various applications. And over the years -- and these things take many years to both design and test and deliver. And what we built was a new piece of equipment, but we found that the manner in which the materials that we would use didn't work properly with that particular piece of equipment. So even though it was a successfully and a very efficient piece of end equipment, we couldn't manufacture in commercial quantities to make it a viable product. So we have taken a write-down on that asset. because we're no longer in the position where we think we can create a viable and commercial product. However, we will retain the asset because down the track, if there are improvements in both materials that we use or just general manufacturing capabilities, there's always a potential that we could revisit this. But for now, we've decided that it's not appropriate to carry it on the balance sheet anymore.