APM Human Services International Limited (APM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the APM Investor Presentation full-year results. [Operator Instructions]. I would now like to hand the conference over to Ms. Megan Wynne, Executive Chair of APM. Please go ahead.

Welcome, everyone, and thank you for joining us today for our full-year FY '24 results presentation. Before we commence today's formalities, we at APM would like to acknowledge the traditional custodians of the lands on which we live. We pay our respects to elders past and present of all Aboriginal and Torres Strait Islander nations. Globally, APM recognizes the significance of Indigenous people's communities and the important role they play within our own workforce and the world. Joining me today on this call are Mike Anghie, our Group CEO; and our CFO, Matt Cooper. We recognize that a lot of the headlines of this result have been released prior to today. But on this call, we plan to take you through the details of our financial performance and the operating environment as well as touch on the current proposed and recommended scheme of arrangement that we have in front of our shareholders. Turning to Slide 5. Before I pass to Mike and Matt, I'd like to take a moment to reflect on the most important result we deliver, that is the impact on the lives of the clients we support. At APM, our clients are at the core of everything we do. We often support the people in our communities in their time of need from early childhood through their life course. Our focus is on enhancing a person's health and well-being independence, employability, and social and economic participation in their community. Our clients include long-term unemployed people in pursuit of meaningful employment, people with disability seeking greater independence, participation, and inclusion in their communities, people with mental health needs, veterans, the elderly, those suffering injury or illness, and many more. At its core, APM is a social impact company. We seek to make a positive lasting social impact through the delivery of our programs. And regardless of the operating environment, we will never lower the standards of the support we provide. It is this commitment to maintaining the highest possible standards of performance in ethics and the delivery of the programs we operate globally regardless of the economic cycle that has established APM as the most trusted partner of governments in the delivery of their most important social assistance programs. The output of this dedication is what you see here. In FY '24, our 15,000 passionate APMs in 11 countries supported over 2 million people. It is this dedication and commitment to our purpose that has enabled us to continue to win important new contracts. In FY '24 alone, these include the Toronto catchment in Phase III of the Ontario Employment Services transformation in Canada, 4 new job core awards, and new workforce development contracts in the United States. Before handing to Mike, I wish to thank you as valued shareholders for your willingness to invest in a company dedicated to creating sustainable social impact. Over the past 3 years, APM has not deviated from our mission to enable better lives, and we remain pleased and humbled by the impact we played as a company. Thank you for your support. I'll now pass to Mike.

Thanks, Megan. Moving to Slide 7, where we're looking at the current operating environment. As we've said previously, more than 70% of APM's revenue comes from employment services, and as such, the unemployment cycle is a key macro driver of our business. Australia and the U.K., in particular, represent our 2 largest volume and outcome-exposed employment services markets. Both of these markets are continuing to see strong economies with tight labor markets and relatively low unemployment. These markets saw unemployment increase back above 4% during recent months. But as you can see, historically, this still represents a subdued business environment for APM. Moving to client flows. On Slide 8, we've presented available public data on provider caseloads in Workforce Australia, together with the public data on clients operating within the online system before coming to a provider for support. Workforce Australia is Australia's mainstream unemployment program. I will note here also that the figures reflect an adjustment in who is included in the program, counting by the department from June 2024 onwards, whereby clients who are fully meeting their mutual obligation requirements for 13 weeks or more were exited from Workforce Australia and will be supported by Services Australia. This included approximately 64,000 people who exited the data at that time. Two things that we'll call out on this slide. Case flows have stabilized year-on-year from the declining trend we've seen up to the half-year in February. And this is illustrated on the right-hand side of this page. While early to say that this change is sustainable, it does feel like there's been some stabilization in client volumes. Secondly, the online cases have held their levels in February. As we have said previously, over time, these participants are expected to be released to providers for support. Beyond case flows, the other key element of APM's revenue in our key volume-exposed markets of Australia and the U.K. are outcome to a placement where APM supports clients into sustainable employment. As mentioned in the half year, we continue to observe a higher proportion of our [indiscernible] long-term unemployed and as such, require more support and intervention to progress their employment journey. This is where APM and our team does its most important work, supporting those into sustainable, meaningful employment. But as mentioned, these clients require greater support levels, which contributes to softer financial performance in recent times in the half just gone. As Megan mentioned earlier, we're always focused on our performance, which translates to providing best-in-class support for our clients on behalf of our stakeholders. Slide 9 is the Department's most recent assessment of performance range across all Workforce Australia contracts nationally. As you can see, APM continues to differentiate itself versus our competitors as a high-performing provider. 17% of our contracts were rated high, nearly 3x the industry average, excluding APM at just 6%. As we noted back in February, we had a particularly strong start to the contract given our people and their experience in mobilizing and commencing new programs. We said at the time, we expected to see providers normalize into the moderate category, but we're pleased to see that our people, systems, and processes continue to position us well. Most notably, we believe we should focus on low-rated contracts and representing regions where providers are exposed to reallocation and where improvement is needed. We're never satisfied with any underperformance, but we've noted again, versus competitors, where only 13% of our contract rate in the low category, more than 3x better than the industry average, excluding APM at 42%. Finally, on Slide 10, we remind everyone of our intentional strategy to build a business with a more balanced revenue mix. For FY '24, the execution of this strategy has seen the mix of revenue from cost plus fixed fee and fee-for-service increased to 67% of our revenue versus 48% in FY '21. While we will clearly continue to pursue programs where our high performers gives us the opportunity to generate higher potential margins in return for exceptional performance. We believe our global diversified footprint will in time generate more predictable and stable revenue and earnings margins going forward. Moving to Slide 12 and before handing to Matt to take you through the details of the financial results for the half, I wanted to touch on the main points. The results we present are in line with what we announced for our scheme booklet and in line with prior guidance. Revenue in FY '24 increased 21% to $2.3 billion, primarily due to a full-year contribution from Equus and everyday independent acquisitions, but also due to organic growth in the U.S. and our health and well-being business in Australia. These were offset by a decline in revenue in our employment services businesses in Australia and the U.K. Underlying EBITDA declined 23% to $280 million, with underlying NPAT down 47% to $95 million, predominantly due to the factors discussed previously in employment services in Australia and the U.K. as well as higher interest rates. Passing now to Matt.

Thanks, Mike. Turning to Slide 13. As Mike outlined, FY '24 experienced strong revenue growth of 21% versus FY '23. Revenue growth was largely through a full-year contribution of prior period acquisitions, including equity in North America with an additional 4-month contribution in FY '24 and everyday independence in Australia with an additional 7-month contribution in FY '24. There was organic revenue growth in the Australian health business and in North America through new contract wins in both Canada and the U.S. However, this was largely offset by a reduction in employment services revenue in Australia and the U.K. Underlying EBITDA was down 23% to $280 million in FY '24, attributable to lower employment services contribution. Underlying NPATA was down for similar reasons and further impacted by an additional $17.5 million in interest expense versus FY '23. Turning to Slide 14. On the balance sheet, the decrease in net assets for the year predominantly reflects an impairment charge relating to goodwill and customer contracts acquired through historical acquisitions. As we disclosed previously, that carrying value is reviewed as part of the year-end audit process. Based on the offer price under the proposed and recommended scheme, there was an indicator of impairment which is now being determined at $269 million. We note that this is a noncash impairment and is excluded from the underlying results and APM's covenant calculations. We would also note that it will not have any impact on the consideration under the proposed recommended scheme. As we announced during H2 FY '24, we have secured financing out to 2030 by our committed facility with Goldman Sachs, which will be implemented at the earlier scheme acceptance or January 2025. We are pleased that this facility now removes refinancing risk from the group and positions us well to weather the current challenging environment. Turning to Slide 15. Underlying cash conversion for FY '24 was 81.8%. While H2 saw a decline versus H1, this is primarily due to timing of working capital with large receipts received in December '23 rather than January '24. The full year cash conversion is in line with our expectations of greater than 80%. Moving to our segments. The A&D segment experienced modest revenue growth of $25.4 million to $842.1 million in FY '24, with underlying NPAT lower at $25.4 million. Revenue growth was attributable to the full year revenue contribution from Everyday independents acquired in February 2023, with organic growth in our existing health businesses, offset by a reduction in revenue from Employment Services. The impact on NPATA up despite growth in revenue is predominantly due to a reduced contribution from our performance-based employment services contracts. We saw some offset from margin improvement from our health businesses, but those remain largely in growth mode, so the impact overall was small. The incremental interest expense touched on earlier also had a significant impact on NPATA margin in this segment. Moving to Slide 18. North America saw a significant revenue growth of $426.7 million to $1.1 billion in FY '24, with underlying NPATA increasing from $43.5 million to $47.6 million for the year. As previously described, the incremental revenue contribution is largely from a full year of Equus, but there has also been strong organic growth of around $68 million from Canada. Canada remains a bright spot for the group with increased contribution from contracts awarded under the Ontario Employment Transformation program, particularly the Toronto catchment recently awarded going forward. Margins in North America were down, reflecting a mix shift to the U.S. under a full year of Equus and organic contract wins in particular job core and lower margins in new contract wins in Canada. Moving to Slide 19. FY '24 delivered revenue of $397.9 million, and NPATA of $22.1 million compared to $436.6 million and $49.6 million in FY '23 in the Rest of the World segment. Revenue was lower primarily due to lower client flow in the U.K. restart scheme and the end of the short-term COVID-19 relief GES program in the U.K. This was partly offset by an increase in contribution from the Work and Health Program and the National Citizen Services program. NPATA was impacted by a reduced contribution from performance-based employment services contracts due to low client flow. Also, cash flows are generally more challenging to support through a low unemployment cycle. Therefore, our cost of service increases as we seek to ensure we deliver excellent client service. Looking forward, we have several priorities that have potential to have meaningful impacts in future periods, in particular, mobilization of the functional assessment services contract, which is ongoing and due to commence in October 2024. I'll now pass back to Mike.