Adrad Holdings Limited (AHL) Earnings Call Transcript & Summary

Good morning and welcome to Adrad Holdings Half Year FY '26 Results for the period ending 31 December 2025. Presenting today is Adrad's CEO, Paul Proctor; and CFO, Rod Hyslop. Today's format will begin with a run-through of the results, followed by a Q&A session. [Operator Instructions] I'll now pass to Paul.

Okay. Good morning, everyone. Thank you for joining us this morning. I'd just probably like to start by reminding people it's now been about 6 months since I joined the business, and I was with the business for 5 months of the first half that we're now discussing. So just to quickly remind people, we do have 2 distinct divisions, what we call Heat Transfer Solutions and another division, which is basically our Distribution division. So they go to market under the brand of Air Radiators for heat transfer solutions and ADRAD for distribution. Quite different businesses. In the Heat Transfer division is a vertically integrated designer and manufacturer of industrial and automotive radiator and cooling solutions, tends to have large original equipment customers. And the Distribution division, ADRAD, is largely an importer and distributor of radiators and a whole suite of products for the Australasian automotive and industrial aftermarket. So Distribution division, primarily aftermarket, Air Radiators Heat Transfer Solutions division, mainly large original equipment customers, 2 quite separate markets. Over to Rod, who will give us the group financial highlights, please, Rod?

Thank you, Paul, and again, welcome, everybody. I'm pleased to present the group financial highlights. So I'm specifically referring to our consolidated statutory reporting here. Paul will, subsequent to this, dive a little bit deeper into each of the business units that he just mentioned previously. So at a group level, revenues increased marginally over the prior comparative period to $77.4 million. And what that's done is it's translated into both an underlying EBITDA and an underlying NPAT increases of 13% and 20%, respectively. This follows on from approximately $1 million worth of corporate restructuring that we incurred earlier and throughout 1H that has left the underlying NPAT and underlying EBITDA increasing over the prior comparative period. Operating cash flow is down compared to the 1H FY '25 numbers. But if you analyze it closely, you'll see that we've invested in approximately $3 million worth of additional inventory, both for range expansion in our distribution business and raw materials required to supply our increasing pipeline, and Paul will talk more to that later. Our capital investment continues similar to prior periods. And so we're maintaining and enhancing our operational efficiency through improved capital investment. And pleasingly, we'd like to announce a $0.0145 per share interim dividend. This interim dividend is fully franked. It's an increase of approximately 4% from 1H FY '25. And it represents approximately 45% of statutory NPAT, and it's another indication that the Board is very confident in both the financial performance of the group to date and the outlook for FY -- the remainder of FY '26. So with that, I will now pass back to Paul, who will give you a little bit more insight into what we've done and the business units. Thank you.

Okay. Thanks, Rob. So we've had a very busy first 5 months that I was involved in the business, principally aimed at getting the right people in the right place, doing the right things. So that's the leadership structure. It's now much leaner and empowered. All of the manufacturing facilities now report directly to me. Costs have been significantly reduced and efficiencies across the business improved. And we've had a very strong look at our product strategy to make sure it's now much more closely aligned with the evolving market requirements, and that's already producing some very significant results that we'll talk about in the outlook. The $3 million investment in inventory that Rod referred to is what I call an excellent investment in inventory because it's actually materials that are required for some significant data center orders that, again, we'll speak to in the outlook. So again, in terms of impact, profit margins are improving. At the management level, people are empowered. And so we are implementing our strategy much more decisively and much more quickly. HTS is very well positioned to benefit from project growth within expanding industries. And fortunately, we are in a range of suite of industries that are in expansion mode. Our distribution business is now well positioned for growth in the second half and in the first 2 months of the second half is now tracking well above prior year. So I think the company is now for the second half and beyond, very well positioned, and we're now after the leaning up and improving the operational culture within the business. We're now pushing into what I would call a structural growth phase. So let's look at the full first half year results. I won't go through the table again. But basically, what's driving our business is continued growth in data center cooling demand, and we've been able to implement capacity in 2 manufacturing facilities now and double up. Power generation projects are strong. And what that means for the future order book for HTS is that the revenue conversion will increase. The reduction in overheads and corporate costs obviously improves our margin and allows us to be more competitive as and when we need to be. So if we look at the actual segment performance there, again, clearly, HTS is a standout. Even with just small increases in revenue, you can see there's a significant uplift in underlying EBITDA. And that's coming about by reducing the cyclicality of our business. And basically, in simple terms, that means we're less reliant on the on-road vehicle market, and we've now got increasing exposure into data centers and off-road markets. So again, 36.7%, a strong underlying EBITDA performance. You can see on the slide below, when we look at the segment, we're in power generation, construction and mining, data centers, on-highway, which is on a downturn at the moment, but it will come back, rail and industrial. So we've continued to build that pipeline of attractive projects in power generation. We just recently received an additional order of close to GBP 17 million for data center units to be built in Lara and Gillman. That doubles our capacity in that space. And we are also busy optimizing our Thai manufacturing facility to be able to meet the demand that we're getting in the off-highway and power generation markets in Southeast Asia. Our Distribution division, you can see there that the underlying EBITDA was hurt by the drop in revenue. I think across the industry, revenue in Distribution was not strong. We have made significant changes in that division to improve its cost effectiveness, but also increase its performance in terms of revenue generation. So we now have in place a new team. We've got a specialist team on cooling specifically, and we're already seeing a reasonable lift, in fact, quite a significant lift in revenue in -- through January and February of the second half versus the prior year. We've continued to work on improving service levels and operational processes. Our inventory is more available, and we've also actually increased our trade customer base by almost 5%. So Distribution division later off the mark, but still very strong and promising signs for the second half. We continue with a strong balance sheet, and I'll hand over to Rod to talk about that.

Yes. Thanks again, Paul. And for those of you who have been on a few of these calls, you'll probably know my thoughts. I think the company has a very strong balance sheet, and it's definitely supported by operational cash generation, as we alluded to earlier. Cash generation might have been lower this half compared to prior period, but that is largely as a result of the investments made in the inventory required to support our growing pipeline and also facilitates that capital expenditure and the payment of dividends, which we've announced, which are both up on prior periods. For those of you looking closely at the contract assets, there was a big movement there from 30 June to 31 December. That's largely the way that we account for our contracts over time, and it reflects the completion of a lot of data center units over the 30 June into the July period that we've subsequently invoiced for. Net tangible assets per share increased to $1.06 per share. Operating cash flow, as we previously mentioned, is still solid. And we believe that the balance sheet supports continued investment in capacity growth at HTS and the distribution expansion in that side of the business, range expansion and expansion of that footprint. So yes, in our opinion, we have a strong balance sheet that supports our future. Back to you, Paul.

Okay. So somewhat repetitive in terms of the outlook because I probably dug into it a little bit on the segment report. But we have pretty much now completed the bulk of our leadership and cost structure optimization, which has now positioned the group to deliver profitable growth, which is going to be aligned with the structural demand across its core HTS end markets. So the key focus going on is that we will realize the full benefits of leadership and organizational restructure as our people do excellent work under a very closely managed strategic plan. We'll continue with our discipline in operating cost management efficiency improvement. The strengthened HTS order book, we have put in place the capacity to convert that into revenue and earnings. And our exposure to the structural growth markets, including data centers, power generation and industrial infrastructure leaves us in a very sweet spot in the market. The HTS mix will increase and our utilization across our factories will improve. Maintaining a disciplined approach to capital allocation while continuing to evaluate value-accretive acquisition opportunities that will strengthen capability, market position and customer reach. The group expects further improvement in operating performance through the second half of FY '26 as all of the restructuring benefits are fully realized and our project execution and order book conversion accelerate.

So with that, that's it from our side. Thank you very much. I understand there were some questions that have come through, and we'd be happy to hear a few of those questions and answer them.

Yes, sure. Rod, could you just let us know if there are any -- if you expect any more restructuring costs in the second half?

Well, I would say, Mel, in the second half, not material restructuring costs, but there's -- the company is always looking at opportunities to improve. And I wouldn't say that's wholesale restructuring, but we are always looking at opportunities to improve and some of it might be one-off costs in, yes, restructuring here and there, but I wouldn't imagine it's a material coming forward in 2H.

Yes. There won't be -- there will be some more middle management changes, particularly in Thailand, where we're heavily into the restructuring phase. But again, as Rob said, fairly immaterial. It will more be normal course of business continually improving and fine-tuning the leadership and management structure.

And just sticking with restructuring costs. Rod, could you just provide a little bit more detail on the components of the $1.1 million restructure costs?

Well, they're largely going to be personnel costs. We believed there was some, I suppose, if you want to use the term headcount creep. Our -- and the Board takes a very strong look at our revenue per head and our basically return on person employed. And we felt that the overhead costs were higher than the company could support. And through Paul's joining the company, we really went through that with a fine-tooth comb to use that expression, and they are primarily headcount-related costs in a restructure.

So it was principally redundancy costs and a lot of those people had not been with the business for too long, but they were quite highly paid executive positions. And the cost -- the actual cost was probably a 3- to 4-month payback because the cost supports a significant year-on-year overhead reduction. So it's pretty much all people [indiscernible].

Yes. And this goes to Paul's final point about as the restructuring benefits are fully realized, 2H, the 1H obviously was a disruptive transformational period for the company. 2H is when we should see the real benefits of those restructurings.

Great. Thanks, Rod. And could you give the kind of annual savings expected from the restructuring and how much needs to be reinvested? And just adding to that conversation, can you also maybe describe the change in reporting structure under Paul and give some peace of mind that the leaner business isn't less productive?

Maybe I'll take that one given I was a principal architect. So any restructuring that I ever embark on is not particularly to reduce cost. The reduced cost is a secondary outcome. The principle is to improve the ability of the organization to execute on strategy. So the people that have been changed are people who I felt couldn't provide the leadership and development of the people that they were in charge of. So the leaders that are now in place, many of them have got 20 or 30 years' experience in the business. So they've got much more experience than the people that they replaced. They've got much more expertise within the existing business, and they are much more hands on. So if we take a specific example, the factories in HTS report to me directly. So obviously, that reduces significantly our cost because it's an executive general manager who is no longer there. And my whole life has been spent running factories all around the world. So I don't need or want anybody in between myself and the factories. All it's going to do is increase cost, but much worse than that, it's going to reduce the level of efficiency and productivity that can be generated at each facility. So that's the view -- my view on leadership of management. And the way I describe it is that the leadership team that's now in place are hands-on, very experienced, incredibly hard-working team who are all working as a team around a strategy that they all understand and believe in. So we just basically uncomplicated the business. And by reducing the number of people in the leadership ranks, we're actually now bringing in people in the engineering and applications engineering ranks. So the reason that HTS is growing is because we have more people aimed at the applications engineering and business development in that segment. So it's not -- it's never to me about the number of people. It's about what impact those people are having in the business. So the people who are having no impact or a negative impact have been removed.

Thanks, Paul. Can you talk through rising copper prices, too? Is this creating margin pressures? Is there a lag between when you can recover from on and off-highway customers? Or are there any changes in the market as a result of cost pressures that you're seeing?

So you said rising costs, but actually, the cost -- because a lot of our imports and our imports are foreign exchange denominated, so in USD, euro, renminbi, whatever it might be, a lot of our costs actually this period through concentrated purchasing efforts have actually come down a bit. And that's why we're seeing margin accretion because it's an improvement in our purchasing position. So that -- part of it compared to certainly 2H of FY '25 are the conditions are better for our purchases. But your question about the lag between cost pressures and margins. So depending on the contracts we have with a variety of different customers, we do have opportunities to engage in price conversations and engagements. So we can pass certain costs on to customers at certain times.

Well, we also have with most customers, a structure in place where the prices are linked to the costs. of materials. And when they go up and down beyond a certain boundary, then we will look at giving them price relief. And when they go above and beyond, then they give us price relief. So we've tied in a lot of our significant contracts to a rise and fall in raw material prices.

And bear in mind also, Mel, that, that is largely on the HTS side. The distribution side, of course, with the nature of the customer base there, it's not contractual in nature. So it's market pricing. And therefore, we are very much more focused on getting the best purchasing outcomes from our logistics and purchasing teams because it's a different relationship with our customers there, but that is something that the company is very much focused on.

Thanks, Rod. And can you -- Paul, this might be for you. Is there any updated thinking on the long-term strategy for the Distribution segment? Is there a prospect of generating attractive returns on capital purely on the enhanced focus of Cooling?

So the Distribution business, again, it's early in the piece for the changes that we've made in the business. The executive who's running the business now has been with it 25 to 30 years. And he's been with it from when it was a few million dollars up to where it's now $70 million. So he knows how to grow this business in this environment. And so I believe at this point in time that we have much further and stronger to run in our Distribution business. I think we're -- in that segment, while we're a market leader in HTS in distribution, we're certainly not a major player compared to some of the significant people in that space. And so we can, for instance, double our revenues in that division and still not be a major player in that business. It's a high fixed cost business for anybody who's going to be national. So I think the business needs a good 1 or 2 years of being what I would say well and aggressively managed to realize that market share improvement, which would actually turn it into a very profitable, strong cash-generative business. So I still believe strongly in the business, and I still think it's important that we maintain and continue to grow that business. I think it's got plenty of legs given the right management.

Can you provide any updates on arriving on a strategy for Thailand? Over what time lines are you expecting results from the change in management there? And then following on from that, how big is the Asian market opportunity comparable to Australia for powergen? And is it structurally less profitable?

Okay. So let's take them one by one. So the Thai plant, the final changes were sort of put in place in January probably. And as before the end of May, we'll have relocated out of a leased facility that was an additional facility and put everything on one footprint basically. So the new team are already -- they're seasoned. One of the people who's running the operations is a 30-year veteran who's operated in Thailand before and has been moved out of our Lara facility. So we're expecting by the time that's done in May, I would say, by June, July. So at the end of this second half that Thailand will be fully reconfigured and highly efficient. And in terms of its operational effectiveness at the moment, a major off-highway Japanese-based customer just came through and gave us the second highest quality rating of any plant that they had ever audited. And the feedback was strongly, we need because there isn't, we need people in this part of the world who can engineer and supply high-quality heat transfer solutions. Every customer we went to see was a similar story. We're still gathering the size of the market, the information on the market. The margins out of the Thai plant will be similar to the margins out of the Australian plant because the costs are lower in that part of the world, as we well know, that's why people are located there. And we're well positioned to supply them. The thing that's not available in that market, and it doesn't seem to be available in many markets is the expertise, is the engineering know-how and the development know-how that we contain within our business. So I think I'll be in a better position to describe the size of the opportunity probably towards the end of the second half. How big that opportunity is versus Australia, significantly more. I wouldn't like to put a number on it because we really don't know what that number is yet. We know it's bigger, but I'm not really willing to say it's 5x or 10x because it could be any of those or more.

Thanks, Paul. Are there any updates you could provide us on the Alu-Fin pilot commercialization?

That's still progressing pretty much to plan. The trials are in the market. And again, I would say by about the end of this year, we should be -- trials should be complete, and we should be commercially active into next year.

Okay. Also, Paul, you mentioned that you expect Distribution to grow in the second half compared to PCP. Do you also expect HTS to grow in the second half comparable to PCP?

Yes, both divisions.

And can you expand on the pipeline for data center cooling demand? Do you have the capacity required to meet this growing demand?

Yes, we do. So at the moment, we need to deliver 4 units per week from -- well, 8 in total, but we've got 2 facilities, so 4 units per week from each facility. So we're able to quickly put in and it's really the capacity is fabrication capacity into the Lara plant, which is where most of our engineering expertise lies too. So it's been a fairly simple process under existing footprint to double our capacity. So we've now got as much capacity in Lara as we have in Gillman. So we've got capacity for more than 12 units per week. We need to make at least 8. And if we saw the demand was there and sustainable, then we can move to an extra shift. So we can basically -- at the moment, we're -- based on our new level of capacity, we'll be at less than 50% of the capacity. So there are plenty of opportunity to grow just by adding a second shift.

Thanks, Paul. And just sticking on that theme, can you explain why your heat extractors are well suited for data centers? And how you compare to competitors in terms of what is your competitive advantage?

So that's a good question because we get a lot of pressure as everybody does in the market about prices and low-cost suppliers. And the way I explain it is like this because it's true. When we need people to work in our business, we generally can't find them. We have to get good talent and then train it with our existing skilled people. So we've got about 700 years of combined heat transfer experience in the business from design and development through manufacturing engineering, through process engineering, through people on the shop floor with welding torches through quality control. So throughout all of our business, we have that expertise. And that expertise -- so for example, we just recruited an applications engineer, a good one, a good well-degreed mechanical engineer. He's on the shop floor at the moment, learning the business. It's going to be a 4- or 5-year training program before he is really able by himself to go out and engineer without support and assistance an application for a customer. So all of this stuff is bespoke. The customer needs us to come up with a design and they need to have a supplier who has the expertise and experience and to risk putting this kind of product, so a data center goes down, I don't know how many millions of dollars per day are at risk. The last thing you want to take a risk on is our product. So we are sort of the masters of the universe as far as I've come across in heat transfer solutions across a huge diverse range. So you get companies in America that might be specialist in powergen. You get companies somewhere else that might be a specialist in on-road. But because of the size of the Australian market, most of these companies have never had to develop the expertise across all of the markets. And in doing that, we have obviously created this massive wealth of knowledge throughout the business. And if anybody wants to replicate it, it's almost impossible. As I said, unless we can persuade 20 of our people to go and get passports and live somewhere else in the world, which is never going to happen, then you're buying your product engineered, developed and built in Australia, and it's always going to work.

And it's the support, too. If something does go wrong, we have a local knowledge and capability, not needing to fly in a foreign company's tech experts from overseas. We are here on the ground.

And it's the same now in Thailand, where we are busy training and developing and putting in our own people to support as and when. And across all of our businesses and in Thailand, we're constantly looking for skilled people who can do what we do. And what we're finding is we have to start from scratch and train them. That's a pretty long process. And you've got to have somebody who's capable of doing the training.

Thank you. We might just go to the last of the questions. Firstly, the improved margins in HTS, are they a function of volume, mix of product and/or cost savings? And are they sustainable going forward?

Okay. So in terms of volume, as you saw, there's not much -- not been much change in volume. In fact, what's happened is that it's a change in product mix. So part of it has been the change in product mix, but the bulk of it has been that we are buying the materials at a better price. We've got the right levers in place with our clients to match what happens in costs. And we're a reasonably high fixed cost business. So having the extra volume through Lara has a significant impact. There's a huge -- there's a big and growing demand in Thailand. So I'd say far from being a one-off, it's the beginning. In terms of is it sustainable? Yes, absolutely, it's sustainable. And I think we're scratching the surface of what we can do in the market given our expertise as we get our people talking to the right customers and supporting them in the right way. So there's plenty more growth in HTS. We're far and away from having all the work in HTS that we actually could have and should have.

Thanks, Paul. And our final question this afternoon is, could you outline the changes to contract assets during the half?

Well, yes, that's -- again, we recognize in our revenue recognition, certain contracts over time. So at any point in time, we might have work in progress that is recognized as a contract asset. And then once it's completed and finalized an invoice, it moves into your -- out of your contract assets into your receivables. So it all stays in your sort of current assets folder. But it's just -- basically, it's recognition that at 30 June, we had a large number of items that weren't complete and invoiced. And subsequent to 30 June, later in the first half, we completed them and invoiced for them. So it's just a rather technical accounting thing, but it is literally our contract assets over time recognition policy, yes, converting from work in progress into receivables into receipts cash.

Thanks, both. I might pass to you for final comments.

To myself, Mel, or to Rod?

To yourself, Paul, we've just come to the end of the questions there. So final comments to you and then we can end the webinar.

Okay. Well, thank you, everyone, for the interest and for some very insightful questions. And most of all, thank you for your interest in our business.