Adrad Holdings Limited (AHL) Earnings Call Transcript & Summary

Good afternoon, and welcome to Adrad Holdings FY '26 results webinar for the period ending 30 June 2026. Presenting today is Adrad's CEO, Paul Proctor; and CFO, Shaun Dawson. 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.

Okay. Thank you very much, Mel, and good morning or good afternoon, everyone. So I'm sure you've probably all seen the pack, but I'll read through some of it and add commentary as we go. So today, we'll take you through the group's financial performance, the operational progress made during the year, the continued development of the Heat Transfer Solutions business and the recent progress that we've made within distribution and importantly, how we are positioned entering FY '27. FY '26 was a year in which we made meaningful progress, improving the operating performance of the group while continuing to invest in the capabilities and markets that we believe will support long-term growth. So let's look at Adrad today. Business is substantially 2 divisions, so nothing changed in that regard, but it is probably worth reminding people briefly on what the divisions stand for. So the Heat Transfer Solutions division is an engineering and manufacturing business, and it provides cooling solutions across a broad range of industrial applications. Capabilities in that business are full service. It extends from application engineering and product design through manufacturing, testing, validation and after-sales support. We have Australian engineering and manufacturing capability together with our Thailand manufacturing platform, giving us the ability to support both domestic and international customers. Distribution provides the second component of the group. It's quite a different business in that it imports and distributes cooling and mechanical products through an automotive trade customer base, the Natrad repair network and the expanding Natrad Autocare network. Our particular strength in that business is our ability to service these larger industrial customers that feed through from our OEM manufacturing business. HTS; gives us exposure to higher growth engineered industrial markets, while Distribution provides a broad customer network and an established platform from which we continue to diversify our product and service offering. Turning to the group's financial highlights. The main point I would draw from FY '26 is the improvement in earnings and cash generation relative to the movement in revenue. Revenue increased modestly, up to $155 million, but importantly, underlying EBITDA increased by almost 11% to $19.5 million. Underlying NPAT increased by 10% to $7.9 million; and operating cash flow, which was obviously the conversion of that EBITDA into cash, increased by 28.8%, up to $17.9 million. So while top growth -- top line growth was modest, we were much more efficient in converting that revenue into earnings. That reflected, particularly in the HTS division, improved operating efficiency, cost discipline and a significant restructuring of the leadership in the business. The stronger cash result allowed us to continue investing in the business with $5.2 million of capital investment during the year, principally in expanding our manufacturing capability. At the same time, FY '26 related dividends increased by 15.2% to over $0.04 per share fully franked. The financial story for FY '26 is improved earnings conversion, stronger cash generation and increased financial capacity. Our key takeaways from FY '26 is that we completely -- we completed a significant leadership and organizational restructuring. The impact of that cannot be understated and will be felt for many years in the company's progress. We doubled data center production capacity in Australia, increased our Thailand capability and progressed the expansion of that facility. We also continued improving manufacturing efficiency and cost management across the group. Within Distribution, we expanded the product offering, continued developing the trade, reseller and Natrad Autocare channels. And now these actions are starting to show through in the financial results. Entering FY '27, we have a clearer strategy, a stronger HTS order book and pipeline, expanded manufacturing capability, and a stronger financial position. The Distribution business has already started to show early signs of EBITDA improvement. The focus from here is execution, converting that platform into sustainable revenue, earnings and cash while maintaining that capital discipline. The key point to bear in mind in this next slide is that FY '26 was not simply about growing revenue. The work undertaken during the year was directed at improving the quality of the business, its cost structure, its manufacturing performance, our product mix, our customer exposure and the business' ability to convert that revenue into earnings. Turning to Slide 7. Looking at the group results in more detail, we can see there that the underlying EBITDA margin increased from 11.4% to 12.5%. And also NPAT margin increased to over 5%. That demonstrates our improved leverage during the year. We certainly had some headwinds in revenue, but I think it proves the resilience of the business by holding a slight improvement in revenue despite lower volume from what was previously our largest single OEM customer. And of course, you would all be well aware of the headwinds created by the problems in Iran, which we certainly got taken by surprise by in April and May, but I'm pleased to say that through June, July and August, the market stabilized with the actions we took. Our profitability is already increasing significantly in that division. Slide 8, 2 very different outcomes for these businesses. I think if you recall, for those of you who were there when I first started with the business last year, the initial focus was HTS. So we got the changes made, the leadership changes and the strategy in place into HTS in the first half of '26. And in distribution, we turn our mind to distribution during the second half of '26. And I think that's also shown through in the results. HTS was the principal driver of earnings improvement, and the EBITDA increased by 40%. That's right, 4-0 to $15 million. That's the division that has most of the manufacturing, and most of you would know from my background, that's where I spent most of my life. So I was very pleased with that result and that it was right across those 3 facilities of Lara, Gillman and Thailand. Distribution had a more challenging second half. We were basically looking at a strong second half up until the third quarter and -- sorry, the fourth quarter. And when business changed, we had to make changes to that business. We've significantly increased prices, and the pricing has held. We've improved margins. The margins have held. And in a sense, it did us some favors in that we significantly reduced the cost base. So the Distribution business, although it had the hiccup in the second half of last year, is actually entering FY '27 looking a much stronger business than it was the previous year. So for '27, the priorities in HTS, we have the order book. It's about now converting that order book and utilizing that additional capacity we've created. And for Distribution, it's continuing to diversify that revenue base while rebuilding the margin and maintaining the cost discipline. This slide shows why HTS is a broader industrial growth platform rather than simply a radiator manufacturing business. We now include data centers, construction and mining, power generation, on-highway transport, defense, rail and broader industrial applications. That diversification is important. It means we can apply the same engineering and manufacturing capability across several markets rather than relying on one customer or one industry cycle. Our objective is to continue moving the portfolio towards higher-value engineered applications, where product performance, reliability, engineering support and manufacturing quality are important to the customer. Our operational highlights during the year, and we believe there were many, certainly started with that 40% increase in underlying EBITDA in HTS. We doubled our data center capacity in Australia, where orders exceeded 400 units. And pleasingly, we were able to pivot and put that capacity in space in less than 6 months, which I think is testament to the capability and capacity of our engineering and manufacturing teams. We secured additional mining and power generation contracts for FY '27. And really importantly, probably the highlight of the page to me is that in Thailand, we added 3 Japanese heavy industry OEM customers, following detailed qualification and product validation processes. And in fact, one of them, Mitsubishi Heavy Industries, said that our Thai facility was the second best facility they had audited in the world. We successfully launched a new lower-cost coil range in that facility. And we then, given the confidence of our customers, approved the expansion of the Thailand facility by more than 4,000 square meters. These activities are very important because the additional manufacturing capacity we are putting in place is increasingly supported by real customer demand and a broader order book. Let's talk about we've -- during the year I've been in the business, I've had a lot of investors in particular ask about data centers. And it is certainly still one of the more significant growth opportunities within HTS. I believe the market drivers are well understood. Investment in AI and cloud computing is increasing. Power density within data centers is rising, and that is increasing demand for reliable critical cooling infrastructure. We've already invested in dedicated capacity in Australia, and those investments have translated into significant customer orders. The next stage is to continue developing the opportunity, including expanding data center manufacturing capability into Thailand. Our identified market opportunities continue to grow strongly. At the same time, it's important to distinguish between identified opportunities and secured revenue. Our approach is to continue building capability in a measured way as customer demand converts. Slide 12, we talk about power generation, mining and OEM growth. And that is a real pillar and a growing pillar of our strategy across HTS. In power generation, we are delivering significant projects into remote areas to support, for instance, an 85-megawatt Western Australian power station. That sort of project demonstrates our ability to deliver large-scale engineered cooling solutions for critical infrastructure. Within mining, we have secured significant contracts for FY '27 and continue to see both replacement and OEM opportunities supported by long-standing customer relationships. And in Thailand, the addition of those 3 new Japanese heavy industry OEMs following the detailed audits has given us a significant expansion of our base in Thailand. These approval processes can take time, but once established, they provide an opportunity to build long-term customer relationships and repeat business. Let's just jump to Thailand for a moment. It's become clear in my time that Thailand is an important component of our HTS growth strategy. The expansion is about more than simply adding floor space. Thailand provides a lower-cost manufacturing platform, additional capacity and closer proximity to Asian and global OEM customers. We've transitioned warehouse space into production use and consolidated our manufacturing operations to improve efficiency. The expanded facility will support industrial coils, data centers, power generation and mining as well as global OEM opportunities. Importantly, the existing freehold site provides us with further long-term expansion capacity if required. From a capital perspective, we will continue to face investment against customer demand and expected returns rather than building capacity ahead of a clear commercial requirement. On to Distribution. The full year revenue result masks quite different trading conditions across the year. Trading softened in the fourth quarter with higher fuel prices and weaker aftermarket demand, affecting traditional radiator repair activity. The more important point is that the channels we have been invested in continue to grow. Automotive trade customer numbers increased by 5%, and revenue increased by 7%. Within resellers, the customer base increased by 6.9% and revenue by 21%. These newer channels are important because they broaden the earnings base and reduce reliance on traditional radiator repair. Importantly, we implemented operating and pricing initiatives in Q4, which significantly improved margins entering FY '27 with early signs of a reasonable volume recovery. There is further work to do, particularly around network efficiency and the operating base, but we believe distribution now is a broader platform from which to improve performance. Let's turn to the strength of our balance sheet, $24.5 million in cash, a slight increase in net assets, and this financial position gives us substantial flexibility. We have opportunities to invest in Thailand, further manufacturing capability in Australia. We have significant product developments and potentially other strategic growth opportunities. But importantly, we don't need to stretch the balance sheet to pursue them. We intend to invest where there is identifiable customer demand or a clear operating return. Let's talk about that cash flow a little on Slide 16. Cash generation was one of the strongest features of the FY '26 result. There is an important working capital element to that result in that our contract assets had increased to $4.7 million by the end of FY '25. And that has now been significantly reduced as those balances have been moved through, product has been invoiced and collections have been made. What is encouraging is what we were able to do with that cash generation. We funded $5.2 million of capital investment, paid dividends and lease obligations, and still increased year-end cash by $6.3 million. As HTS undertakes these larger engineered projects, working capital movements can vary, depending on the procurement, production, delivery, invoicing and collection. Maintaining that discipline around working capital, therefore, remains an important priority as the business grows. Okay. Turning now to the outlook, which I'm sure is probably what everyone is most interested in. We obviously enter with a stronger operating and financial position. And what's really important is that the work that we did in FY '26 has improved profitability, strengthened cash and expanded our manufacturing capability. And whilst we only got a portion of that improvement in FY '26 because that's the year that was -- the changes were being made, we will get the full benefits in FY '27 and beyond. Our focus for FY '27 is on converting that improved platform into sustainable growth. So the key theme in FY '27 is conversion. Within HTS, we entered the year with a substantial order book and growing opportunities. The focus is on delivering those existing customer orders as we continue to progress the wider opportunity and increasing utilization across Lara, Gillman and Thailand. We continue to progress our product development, including the long-awaited for Alu Fin while deepening our OEM relationships. Within Distribution, the priority is to continue expanding mechanical trade, reseller and Natrad Autocare channels whilst continuing to improve the operating performance. The position -- the business is very well positioned to deliver a stronger half year result than the prior corresponding period. It's already supported by the substantial HTS order book. From a financial perspective, we'll maintain discipline around capital allocation working capital and operating costs. We will assess acquisition opportunities where they strengthen capability, customer reach or market position, but any transaction will need to meet our strategic and financial criteria. We enter FY '27 with improved visibility, stronger financial capacity and a much better operating platform than we had entering FY '26. In conclusion, it was another FY '26 with an important step in the development of Adrad. We improved profitability materially faster than revenue, generated stronger operating cash flow and continued to invest in the capabilities to support future growth. As I've stated, we will get a full year's benefit from all of that in 2027. In HTS, we've increased our exposure to structurally attractive markets, strengthened the manufacturing platform and entered '27 with a growing order book and pipeline across data centers, power generation, mining, defense and significant OEM customers. Distribution continues to provide that important platform for the group, while we broaden its product and customer channels and continue the work to improve margins. Our focus entering FY '27 is clear, convert the opportunities in front of us into sustainable revenue, earnings and cash while maintaining the operating working capital and capital allocation discipline that supported the FY '26 result. Thank you for that. And Shaun is with me at the moment. He's got a freebie on this year's discussion being new in the role, but I can tell you he's very well across all of the numbers, and we're both very happy to take questions. Thank you.

Our first question is from [ Adam ] at Taylor Collison. He asks how are those new OEMs in Thailand likely to behave compared to existing OEM supply. Should we be thinking consistent large purchase orders? And what will drive their purchase order frequency and needs?

Okay. So that was -- that's a good question. Thanks, [ Adam ]. So there's not a lot of difference in the OEMs that we've secured for the Thai facility other than being of Japanese heritage. They do tend to have a longer gestation period and a longer period of gaining confidence. But what's critical is successful completion and delivery of the first orders. We've done that for 1 of them, 1 of the 3 already. Upon successful conclusion of those orders, then there's no difference between how they would be -- behave versus any other OEM that we would get. And their networks across that region are extensive and substantial. So we expect the work after the first orders to begin to flow thick and fast.

[Operator Instructions] [ Jake ] from Moelis asks what defense opportunities are in front of you or is there an expansion of some of the sales work you have done previously in the Bushmaster design? Can you provide some color around the average revenue per unit for the data center cooling units?

So we prefer -- on the conclusion of the question, we prefer not to add color to the data center unit margins or costings because, obviously, that's reasonably commercially sensitive. They are obviously -- other than to say that each unit is of, in our industry, high value. Around the Bushmaster, yes, we have been on that program and are on that program, and that is part of our defense contracts.

That looks to be the end of the questions that we've received. If anyone has any other questions, feel free to e-mail me, and we'll get back to you privately. I'll -- sorry, a couple have just come through. I take that back. Paul, there's a few questions that have come through. One is on the data center. As a follow-up on the last question, do you expect to report a segment for data centers in the future?

It's not something that we have planned to do. We're happy to entertain further discussions with the Board and with key investors, and that may be something that we would consider in the future.

Great. And sticking with data centers, can you quantify the level of revenues from data centers? And how much in sales can your current production capacity support?

So data center segment during my brief time in the business has been approximately doubling in volume each year. And I think that's probably already in the public domain. It's a significant portion. It's coming up to 1/3 of the overall revenue for the HTS business, and our actual capacity on data centers in Australia would be approximately double the existing business that we do. And if we put in the capacity in Thailand, which we intend to do, then that would double the capacity again. So basically, we can go 100% more than what we've currently got with our existing capability, and then we can go another 100% when we introduce that into Thailand. So we could triple our capacity in that area. We'd expect broadly the market to grow by that amount if it meets the industry forecast through till 2030.

Okay. Great. And going back to [ Jake's ] question on defense and sales, are there any other defense opportunities? Or is it limited to Bushmaster for now?