ARB Corporation Limited (ARB) Earnings Call Transcript & Summary

Today, Damon will take you through our financial update on the half year results, and I will present an update on the businesses, sales and operations. At the conclusion of the presentation, Damon and I will be answering that...

Thanks, Lachlan, and good morning, and welcome to our call this morning where we're announcing our results for the half year ended 31 December 2023. It outlines the company's sales revenue and profit before tax and after tax. Sales and the profit results are broadly in line with the first quarter results we announced at the company's Annual General Meeting in October 2023, where we advised sales growth of 0.7% and profit after tax growth of 10%. To the left of the slide, the company achieved sales revenue of $341.5 million, an increase of 0.2% compared with last year. Sales were unfortunately hampered in the month of December 2023 by the industrial disputes across Australian ports, which held up both inbound and outbound containers impacting on both domestic sales via delays receiving containers inbound and export sales via delays dispatching containers. We note, however, that sales in the month of January 2024 was strong as the industrial dispute was resolved and port traffic resumed uninterrupted. I will talk to sales by channel in the next slide, demonstrating sales growth in the Australian aftermarket into the OEs with export sales continuing to be a challenge throughout the half. Importantly, new vehicle supplies improved around the world, particularly in Australia and the U.K. ARB's operating profit before tax of $72.5 million reflects a 12.6% increase over the prior half. I will, however, pause to highlight that the statutory accounts reflect the reported profit before tax of $70.8 million, which is an increase in profits of 9.5%. The reported profit before tax includes an expense of $1.7 million relating to the Truckman acquisition purchase price made back in 2021. Now some of you may recall that the Truckman acquisition included a deferred payment contingent on prospective earnings over the 3 years following the acquisition. New vehicle supply into the U.K. decreased significantly during the COVID period, and Truckman's profit results declined significantly, initially indicated that the deferred payment was unlikely to be paid and the company wrote the provision back to profit last year with a corresponding reduction in goodwill. We are pleased to report, however, that Truckman's business has rebounded very strongly in the last 6 months, and management now estimate that a payment of $1.7 million will be paid. In accordance with the accounting standards, the provision raised for the final payment must now be expensed rather than adjusted against goodwill. Profit growth exceeded revenue growth, which has driven -- which was driven by improved gross margins, reflecting reductions in freight costs and the impact of sales price increases. Profit before tax reflects 21.2% of sales, excluding the Truckman adjustment. To the right of the slide, profit after tax of $52.9 million, excluding the Truckman adjustment just spoken to, was 12.3% higher than last year. The Truckman adjustments do not have any tax effect as they relate to the tax cost base of the investment, and accordingly, the expense of $1.7 million against profit before tax carries through to profit after tax. Reported profit after tax was $51.3 million and grew by 8.1%. Earnings per share grew by 11.9%, excluding the Truckman adjustment. In terms of sale to the left-hand side of Slide 4, the Australian aftermarket achieved a growth of 3.7% over the corresponding half year despite ongoing challenges with the fitment of accessories to vehicles with a tight labor market and fit is continuing to be difficult to recruit during the half. Growth of 3.7% for the half reflects the Q1 growth of 2.1% advised at the AGM in October and Q2 growth of 5.5%. Export sales declined 13.6% during the half. The decline reflects an ongoing challenge in the U.S. where distribution channels are yet to consolidate following the continued restructuring of ARB's largest U.S. customer over the last year and more. Sales in New Zealand were impacted by the government-imposed view tax, which added thousands of dollars to the cost of a new vehicle, specifically those vehicles falling within ARB's target market, and that tax was subsequently repealed on 1 January 2024. Positive signs are evident with export growth achieved in the month of January 2024 and improved new vehicle supply around the world. Sales to original equipment manufacturer customers increased 53.8% during the half year, driven by increased volume of existing contracts, reflecting the increase in new vehicle supply to the market. We expect sales to OEMs in the second half of this financial year and into the following financial year FY 2025 to continue to grow. Slide 5 outlines the company's profit and loss statement, and it reflects the sales revenue increase of 0.2% and underlying profit before tax growth of 12.6% as discussed on the earlier slide. Items to call out in the profit and loss statement, where you can see the Truckman adjustments spoken to on Slide 3 are highlighted at the bottom of the table reconciling the underlying profit before tax of $72.5 million with the reported profit before tax of $70.8 million. Of particular notes and the key driver of the result for the half is the improvement in gross margin reflected in the materials and consumables used line. That is the fourth line in the table, which decreased from 47% of sales last year to 42% of sales this year, in line with previous years. This improvement in gross margin reflects the sales price increases pushed through last year to offset inflationary pressure on the company's cost of products sold and operational cost base, a significant component of which is fixed. We note that employee expenses grew by 3.3%, which is less than current inflation levels as the company drives for efficiencies and tightly manages its headcount and wage increases. Depreciation increased 12.3%, reflecting the company's recently increased capital expenditure program. Whilst advertising costs increased 10.8%, the cost is maintained at 1% of sales revenue. The decrease in distribution costs of 9.4% reflects easing in shipping rates back to historical levels, and the occupancy costs, which increased 16.1% over the period reflect new sites and higher power, electricity and gas costs. You will note a new line in our profit and loss statement being equity accounted share of profit/loss which I'll talk to on the next slide. Other expenses have increased 20.8%, driven across the board in this inflationary environment with particular call-outs for insurance premiums, audit costs with Deloitte appointed as the external auditor around the world, replacing picture partners in their [indiscernible] affiliates and rising software costs. Overall, the company's operating profit of $72.5 million increased 12.6% over the prior corresponding half year. Slide 6 outlines the company's cash flows during the year. The company generated cash from operating activities of $71.6 million, which compares favorably with the profit after tax of $51.3 million and the noncash depreciation and amortization expense of $14.2 million. It also compares favorably of the cash generated from operating activities last year of $24 million, which was impacted by increasing inventories in the prior half year. I'll note that inventories reduced slightly in this half year. The company expended $26.1 million during the half year on capital purchases, $18.7 million on land and buildings and $7.4 million on plant and equipment. The company made 2 investments in associates during the half year at a total cost of $11 million. Firstly, ARB acquired a 30% interest in ORW-USA for USD 5 million. ORW currently operates 9 retail stores in the U.S., soon to be 11, and ARB's investment will accelerate ORW's plans to expand its retail network. And secondly, ARB acquired a 49% interest in Nacho LED for USD 2 million. Nacho was only recently established, and ARB's investment will facilitate the development of innovative lighting solutions for the 4 by 4 in automotive industries. Now our management team has interactive with the principles of both Nacho and ORW over many years, and we look forward to combining the company's respective strengths. The company paid cash dividends of $21.1 million during the half year, reflecting the final dividend for FY 2023 paid in October 2023. The dividend was fully franked at 30%. And just finally, on Slide 6, the company was holding $53.6 million in cash at the end of the half year and has no debt and carried no debt throughout the 6 months. This was an increase of $8.6 million from 30 June 2023. Just to conclude my part of the presentation on Slide 7, the Board has declared an interim fully franked dividend of $0.34 per share. This represents a dividend payout ratio of 54.5%. Now this compares with last year's interim dividend of $0.32 per share, an increase of 6.3%. The dividend reinvestment plan and bonus share plan will both be in operation for this dividend with a 2% discount and will be paid on 19 of April 2024. I'll now hand back to Lachlan.

Thank you very much, Damon. Moving below to the sales and operations presentation for today, and I'll start on Slide 9 with a summary of the Australian aftermarket. ARB store network comprises of 74 stores nationally, 30 are company-owned and 44 are ARB branded stores, which are privately owned. In the first half of the financial year, as Damon reported, the domestic aftermarket grew by 3.7% to $204 million, representing 59.5% of total sales. The company pleasingly achieved growth in all Australian states and territories. This is a strong result that reflects sustained higher revenue despite interest rate pressure and weakening consumer confidence. The committed customer order book remains consistently high and domestic order intake in the first half of the financial year was strong. We continue to see demand from private store network owners for new store developments, a healthy number of sites in various stages of planning through ARB's independent network will come to market in the coming years. On to Slide 10 and a snapshot of some of these developments. We continue to invest nationally in both the quality and the quantity of retail sites. In the last 6 months, ARB has completed flagship upgrades to Osborne Park, Western Australia and Canberra ACT, we've almost doubled the store footprint from its original site of more than 2 decades. These all new sites in existing regions are now up and running. An all new site in Auburn New South Wales is on target for completion imminently, we've almost again doubled our retail footprint. Construction is well underway in Mornington and this all-new flagship store is due for completion in Q3 calendar year 2024. And finally, ARB welcomes JCO Adelaide to the family. JCO have undertaken a huge 20,000 square meter development site for their own products, which features a dedicated ARB showroom as a part of the retail presentation. The showroom was designed to ARB's flagship specifications and is an exciting extension of ARB's independent store network. On to Slide 11 and fitting performance. In previous presentations, we've highlighted fitting output as a bottleneck in the corporate and independent store networks. Initiatives focused on employer retention, skill development and increasing the total number of fitters in our business has been a key operational focus. While improvement has been gradual, there have been positive progress through the first half and most particularly in the last few months. Fido retention was materially higher in the first half of the financial year 2024 compared to the prior period. Fitting staff numbers in the same period grew by almost 6 -- sorry, by 6%, aided in part by the results of the Fast Track induction program. Based on tenure, qualification and programs such as Fitter Pathway, our worktop experience and performance continues to increase from historical lows in 2022. Over time, as a percentage of total fitting continues to increase, and ARB has committed to additional qualified technicians under the government's 482 Visa program, we expect these new team members to join us towards the end of this 2024 financial year. Continuing on the operations of the Australian business. Industrial action, as mentioned by Damon, of Australian ports in recent months, particularly in the lead up to Christmas when ARB customers were gearing up for the holidays did affect revenue in the second quarter. In the new year, container processing remains slow. However, now with industrial action behind us, we are pushing our national DCs to process higher volumes of inbound containers to catch up from the backlog. There are a couple of key supply quality issues that dampened the domestic and international sales for the first half. These quality issues are largely behind us as we work with our key suppliers to expedite recovery stock. The Australian aftermarket is insatiable demand for pickup vehicles and 4x4 SUVs continue to drive a strong ARB order book. All-time record sales of key platforms such as the Ford Ranger, Toyota Hilux, Isuzu D-Max and the family of Toyota Land Cruisers underpinned healthy order intake in the first half of the financial year 2024. Now moving on to the international export business. In the reporting period, ARB's export sales declined 13.6% to $109 million, representing 31.8% of ARB's total business. There are a number of contributing factors that worked against the export business in the first half, including the previously mentioned supply quality issues, increased interest rates, continued weakness in U.S. distribution channels and business disruption caused by conflict around the world. An interesting one for investors and the most obvious one that comes to mind is one of our long-term distributors in [indiscernible], who unfortunately had their warehouse and [indiscernible] assembly line destroyed during a bombing last year. Very fortunately, none of the team inside and our long-term partners in the Ukraine were personally affected by that, but that it has resulted in a stock to their business. In more positive news, and as mentioned by Damon, we're delighted to report the rebound of our Truckman business. The ebbs and flows of business coming out of COVID are very evident in this result where the U.K. market will start the vehicles for an extended period of time, leading to a significant drop-off in sales. With vehicle sales recovering in the first half of the financial year, Truckman's business has very pleasingly bounced back. And finally, on New Zealand, the Green car tax confused and disrupted the broader automotive industry during 2023 and has materially impacted ARB's New Zealand sales. Under the new government, this tax that targeted popular pick-up models has been repealed and ARB has started to improve trading in the new year as pickup sales recover. And while we're on New Zealand, we are extending ARB's flagship store model from Australia to key international markets, which is a key strategic initiative to strengthen ARB's global brand. New Zealand is a focused export market with healthy pick-up sales, and active outdoor recreational culture and a high wealth population. The development of the flagship store in Hamilton, New Zealand is nearing completion and will be open for trading in March this year. I shout out to Niko, I believe joins these calls and the team in New Zealand were excited for you and our New Zealand customers with this great new site to open. On to the U.S. business and an important update. With the accelerated progress of ARB's OEM business with both Ford and Toyota and the requirement to focus on our core aftermarket business, we've invested in the structure to adequately support each of these sales channels. Senior executives with experience in their respective areas have been appointed to ARB USA to lead each of the aftermarket and OEM sales channels. With this new structure and key leaders on board, we're confident in future sales growth of both the aftermarket and OEM channels. Importantly, our new Vice President of Aftermarket brings over 30 years' experience in retail store development and operations, new product development, brand management, e-commerce and general daily aftermarket operational performance. As previously reported, the Seattle flagship site remains on schedule for an opening in calendar year -- in Q4 calendar year 2024, all permitting is with local government and construction is due to commence in coming months. Toyota USA's marketing machine is now in full swing with the launch of the 2024 Tacoma, which I'll take you through in more detail in a couple of slides. Ford USA is also due to launch the 2024 Ranger during coming months. On the back of the FLA program in Australia, ARB has collaborated with Ford's engineering team to ensure key accessories from a global Ranger also fit the U.S. version. Despite the vehicles looking very similar, the same model for the 2 different markets have key differences that required all new products to be developed. ARB and Ford have been working closely to have a healthy number of products available for their dealer channels at launch. To strengthen ARB's access to retail consumers in the U.S., ARB has previously reported our investments in Off-Road Warehouse, which has 9 retail sites, largely in Southern California. The business grew through 2023 with minor disruptions in Q4 calendar year 2024 due to new vehicle availability. ORW continues to focus on store growth. Our store number attending Glendale, Arizona is on track and due for opening in April 2024 and the final stages of the lease negotiation is well progressed for store #11. On the Slide 17 and an update on our U.S. e-commerce program. At the AGM -- at the 2023 AGM I reported that we have launched our first e-commerce site in the USA at www.arbusa.com. The launch, which happened just before Black Friday and Cyber Monday exceeded our expectations and has performed pleasingly in key metrics, including daily order intake, average order value and profitability. This platform has given us extremely valuable insights into end-user demand. It has highlighted weakness in our wholesale business and brought a number of product opportunities to our attention. ARB will continue to invest in the optimization and growth of this U.S. e-commerce business to enhance and increase our omnichannel customer experience. And very exciting to report today on the launch of the Toyota Tacoma Trailhunter in the U.S. In recent weeks, Toyota has unleashed its marketing machine on the class-leading midsized pickup to 2024 Toyota Tacoma. Featuring heavily in the pinnacle of U.S. marketing, the 2024 Super Bowl, the centerpiece of this push has been a halo model trail Hunter, which features 5 different ARB branded products, including the ARB steel rebar and branded recovery points, ARB sports bar, ARB Bedrock and Old Man Emu Suspension. Toyota's marketing campaign for the Trailhunter and by extension, ARB brand marketing is now featured heavily on their website, social media channels, national television commercials and various other national consumer activations. This uniquely positions ARB's brand in the U.S. alongside the #1 vehicle sales company in the country and by extension catapults our brand reputation for quality and innovation in the largest consumer market in the world. On to Slide 19 and our OEM business and a great new story for the half and the growth of this sector. The year-on-year success of ARB's OEM business is very dependent on the timing of new model launches and vehicle availability. ARB provided guidance to the market on a forecast increase to OEM business, which has materialized in a 53.8% increase in OEM revenue to the half. Key considerations in this result include increased sales of key models, vehicle models in Australia and increased volumes of existing offshore contracts. We have seen healthy order intake on existing contracts for the second half of the financial year. And importantly, invoicing for contracts to Toyota USA business have not yet commenced. These will kick off late in the second half of the financial year. Various existing and new contracts are expected to increase sales in the second half of the financial year and beyond. And now to an update on products. ARB continues to lead the 4x4 aftermarket with innovation and technology in our key product categories. With over 130 engineers in Australia and around the world, we continue to invest heavily in new product development. Today, I'll run you through a couple of these recent updates. Earth Camper continues to attract incredibly strong interest in Australian overseas. Supply to market has been slower than expected. We've been working through improvements to the build process of manufacturing and tightening quality on this all-new product. International orders have been received and shipped to markets where low compliance requirements means that we've been able to sell the camp as is compliance for key markets, including the U.S. and Europe are progressing well, and we expect to finalize compliance within 2024 calendar year for product sales or campus sales during calendar year 2025. And on to our MT64, which is our new shock absorber. We've been delighted by the market acceptance of this new shock absorbable with demand strong in both Australia and internationally. Production continues to grow with demand as to the number of applications under development with more than 20 new vehicle models currently in the pipeline. Our engineering team has grown more than 10% in the last 12 months as the organic opportunity for rangers mention continues. Key launches of new models by OEMs in recent months as well as their focus on class leading new products is keeping our engineering team very busy. We expect to launch 3 significant all new products in calendar year 2024. And finally to the outlook. The directors and the senior leadership team are very excited about the future of ARB. With various key initiatives to support future growth underway and a very capable senior leadership team, we have a strong vision of success for the future. The Australian aftermarket order book remains strong, with gradual improvements to feeding capacity and an accelerated store development program, we have a confident outlook to the short and medium term of the Australian business. ARB is focused on the export business, particularly the U.S. We're confident we'll return to growth in the short term. Investments in off-road warehouse, the new e-commerce site and strengthened leadership team, a great lead indicator for future success excited to launch our flagship new flagship stores in the U.S. and New Zealand during calendar year 2024. ARB expects OEM sales to continue to grow in both financial years 2024 and 2025 as new contracts materialize. This is all underpinned by an experienced leadership team, a very strong balance sheet with $54 million in cash and a great pipeline of new products. Supporting this sentiment was a strong January result in the domestic, export and OEM businesses and a positive start to the business in February. That concludes today's presentation. Thank you very much to the shareholders and investors for taking the time to join us online. And I'll now hand over to Damon with some questions we've received.

Thanks, Lachlan. A couple of financial questions to kick off with first and just as they're coming through.

Question received was, do you expect to maintain the current gross margin performance in context of current trends on raw material costs, foreign exchange, et cetera. And is there more improvement to come as new orders roll through the order book into cost of goods sold? Gross margins have returned to historical levels. I mentioned in the presentation a little earlier that the materials and consumables used back at 42% of sales. And that's where they were prior to COVID, and we expect them to remain about there. In terms of growth though, we have seen some growth in sales price increases have flowed through to our invoicing. There was a bit of a lag in the invoicing coming through up to 2 or 3 months. But we expect to maintain these margins going forward. They're in line with historical levels. They reflect a profit before tax percentage to sales of 21.2%. That's historically higher as well. Pre-COVID typically performed at about 17.5% of sales. And we would -- the target, which we've spoken to previously, is around that 20%. So we expect the gross margin and the profit before tax to trade at these levels into the short term. Foreign exchange has been a little bit of a drag on the business this current financial half. So we're hoping for some relief and we'll certainly circle -- cycle off of the lower Australian dollar as we move into the second half and into FY 2025. What I should highlight, however, is that we are cycling lower gross margins in the first half, and that's reflected in the growth. Whilst we'll maintain our margins into the second half, we don't expect the growth to be as profound as it was in the first half. Another question was around operating cost lines, employee, distribution costs, occupancy costs well contained versus prior comparative period. If sales growth accelerates from the first half '24 level, does operating cost growth accelerate to or would you expect positive operating leverage? We expect there to be some leverage there, but probably not a lot, 21.2% margin profit before tax to sales is at the upper end. And I expect that the cost will probably increase closer in line to sales, albeit that there should be some efficiency and leverage to be achieved. A couple of other questions. Yes, do you want to take those ones?

Yes, sure. Sorry, just lock them back with the microphone. Can you give us some perspective on OEM partnerships, for example, FLI expanding to new markets overseas, how is it going up coming toward a launch? The partnerships overseas and I think evidenced by the presentation are going well. There is a lot of attention -- positive attention to ARB's brand in international markets. And broadly speaking, the attention to the overlanding sector in those markets is attracting the OEM's attention. And ARB has been in that space for the longest time we are seeing as the 4 fibers of overlending, particularly in that U.S. market. And so we'll continue to leverage our position with respect to that. FLA has expanded to other international markets outside Australia, including the U.S., Europe and to a limited extent, in Southeast Asia. So broadly speaking, we are pleased with the growth and the development of these OEM partnerships. But again, and as previously reported, the use of our brand is really the corner piece of that initiative. And we do see continued growth in that space going forward. There's a further question about the port disputes and trying to quantify the impact of the different segments. I don't have that data at hand and nor will be providing that to market. But we were very specific in monitoring container -- containers being brought into our warehouses in DC's. There were significant disruptions in November and December. We are getting back on top of things now. And the disruption not only affected our domestic Australian aftermarket business, but we do a lot of consolidation of product in Australia for reexport to international offices and customers. So it was not only an impact on the domestic business but also on the aftermarket, the exports business as well. And then there's a question around the issues to the Earth camp quality build, what issues have we found? Look, this is an all-new manufacturing process for us. It is something that we have -- we are learning as we go. We are taking our time. We have had a couple of products in market that we've found issues with. And so we are double and triple checking our work and making sure that the build quality is in line with ARB's very high expectations. We prefer and very clearly, we want this to be a very long-term product for us. So we are not rushing to get product to market. We have to make sure the product in market is right, particularly as we look forward to exporting the product internationally, it's one thing to be able to try to fix the product once it's in the domestic business. But once we have that product floating around overseas, it obviously becomes far more complicated for our engineers and technicians to get their hands on. And then there's a final question here, which may be just a clarification. Do some of the quality issues that you referred to relate to the MT64 shock absorbers. And the answer to that is no, the quality issues that we're referring to were not related to the MT64 shock absorbers. Those are manufactured in-house and at our to manufacturing facilities, and we do not have quality issues with that product.

Lachlan just I'll pick up another question here. What impact do you see the Commonwealth government's proposed emissions cap on manufacturers having on retail pricing of [indiscernible] and 4-wheel drives and underlying demand? At this time, I'd suggest it's a little early for us to be commenting on this. The last material that I read on this suggests that the government is yet to release their plans and their pricing. So we'll hold off on this and perhaps revisit this the next time we present to Market. Next question. Sorry, [indiscernible] back at the microphone.

New Zealand. Is it possible to quantify the impact of the deferral of volumes due to the repealing of the green car tax policy? I would suggest no, we certainly anticipate that we are going to see much stronger revenues. But certainly, in the last quarter of the calendar year, vehicle sales slowed to almost nothing. And it's pretty obvious that that's going to affect our business materially. Keeping in mind that the acquisitions of the companies that we have in New Zealand had made, which were previously viewed were centered around the sales of the Canopy products and the Canopy product is something that we typically see sold on new vehicles. So yes, a material impact to the New Zealand business. Further question, the competitor has called out issues of production at key Toyota models of Toyota have you heard anything on this? I am not in a position to comment on Toyota's quality issues. We will focus on our own quality as a business. And please feel free to refer that question to Toyota. For that Toyota issue with emissions testing has impacted ARB in any way, any insights you can share? And I think Damon's adequately answered that question. So we'll leave that one is ready.