Big River Industries Limited (BRI) Earnings Call Transcript & Summary

Big River Industry FY 2020 Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Jim Bindon. Thank you. Please go ahead.

Okay. Good morning, folks. Thanks for joining. I realize it's a busy time of the year. Jim Bindon speaking here. I've got Steve Parks here as well, the company's CFO. He'll run through the financials shortly. Yes, as I said, just want to thank you. It's obviously a busy time and particularly with the market volatility this morning, appreciate you taking the time to join the call. So I'll go ahead and just going to go through the results presentation which was uploaded this morning, so I'll just do a page turn on that as the structure of the call. So just starting on Page 3, which is just a little bit of a summary of where Big River sits as of today. I won't go through it all, but just to make a few points. That table and graph and map and so forth are being updated for the acquisition that we announced a week or 2 ago, due to settle in early March in Adelaide. So the various ratios and so forth pro forma those numbers on an annual basis. So perhaps just a couple of points to note there. Obviously, our exposure to the building products, which is the largest of our segments, predominantly going into residential construction, you can see is just a click over 55%, but certainly still have good meaningful exposures to those 2 specialty segments of formwork and plywood and architectural and specialty products being 1/3 of our segments. From a construction segment point of view, again, I won't go through the pie chart there, but in our view, a good spread and a good diversification, which we believe, I guess, the mainstay of our results, which we'll go through shortly. The mix of assets there, we'll have 18 distribution sales sites around the country now, including a couple of manufacturing plants. Hopefully, they come into their own as the overall supply chain for plywood is challenged given the COVID-19 virus, which I'll talk about a little bit later. But certainly, those legacy plants we have there, hopefully, will help our business, 3 fabrication sites for frame and truss, including the new Adelaide business. I think we're getting a good meaningful exposure to that very large segment. So I think that's continued to roll out our strategy that's pleasing and then a couple of specialty lines with respect to both architectural panels and steel rolling. And then the split by segment there, I think is -- sorry, by region, is quite a nice mix, effectively close to 30%, 30%, 30%, plus a 10% exposure to New Zealand, which has certainly helped in these half year results. So just moving to Page 4 just from a headlines point of view. You can see there, revenue up about 19% on a statutory basis. Where did that come from? Well, we got some good growth from the new New Zealand business where the construction metrics in that country all look quite positive. And that's offset by a decline in Australia of around 3% on a like-for-like basis. So predominantly as those residential starts have slowed quite substantially, our view is the addressable market for Big River is down around 6%, and that's taking our weighted exposure across that pie chart from the previous slide there. So I think, well, I'd say we're about par on what we saw as the overall market being down 3% versus, say, circa 6%. From a profitability point of view now, when I talk today, I'll talk all pre-AASB 16 so we can kind of compare apples and apples. But obviously, as Steve goes through the results, you'll see the statutory results, which, for us, at an EBITDA level look quite different. But certainly, the figures I refer to will be on the pre-AASB basis. So $6.2 million, that was up 38% on the prior period. Earnings per share, up 17%. I think still a credible result given the additional debt and equity that we took on as part of the acquisitions completed last year. And then from a cash management point of view, I think both our working capital performance and cash conversion were broadly within our targets. We certainly believe we can do better there. And we will be looking for further improvement in the second half, but they're pretty solid and pretty consistent with our historic percentages there. So from a financial point of view, I think, a credible result in what is certainly, I think, a really tough market in many respects. We can talk about that a bit further as I move through the presentation. From a few of the highlights perspective, I think probably one of the best things that's happened for us during this half is the gradual weighting up of our gross margin. That's obviously a key part of our strategy, up 170 basis points. I'll go into a bit more detail later, but that's split largely from improved purchasing scale, slightly better product mix and then also the impact of the New Zealand business coming through and improving our product mix and hence, our gross margin. That's a key part of the strategy, which we've outlined in times gone past. That's pleasing in a tough market for us to see some good progress on that particular line item of our strategy. With respect to formply, where we are the market leader in Australia, we grew our volumes 10%. I think that was a pretty good result given our view of the overall formwork market actually declined for the half. Formply is only one of the basket of products sold into the formwork market for the placement of concrete. But certainly growing our volume there, I think, was particularly pleasing. I think our dual supply chain from both China and our local manufacturing plants is really starting to gain traction there. And hence, that market share growth is really a result of that improved supply chain position. Steel also went quite well in the formwork sector, where it was basically flat with the prior year. I think, again, a pleasing result that translated into some market share improvement. The cost-out component of our manufacturing rebalance, which we've spoken about on these calls in times gone past, $4.5 million of cash cost we stripped out last financial year, a further $0.5 million in the first half. So the heavy lifting was really done last year, but at least we've maintained the same structure and also delivered some more savings on top of what was achieved last year. That was pleasing. And from a manufacturing point of view and a pretty tough environment, I have to say, we stabilized our earnings and now are equal with the prior period. And that was certainly despite some substantial log disruptions to do with the fires, particularly on the North Coast, where our hardwood log contract is. And the fires there were sort of much earlier in the season, through September, October, November, whereas the big fires around the Tumut Region, which affected our pine wood supply, effectively happened starting on New Year's Eve. So that really will flow into the second half, but that was certainly a factor that we dealt with during the period. From a strategy point of view and just at the bottom of Page 4, the acquisition of Big Hammer in Townsville was completed in August. And that business, together with our original site in Townsville, had been fully merged together. So whilst there's always a little bit of integration cost in the early months, that's fully integrated now and we're certainly pleased with the way that's traveling. The Pine Design acquisition, I spoke about, due to complete soon. So I think that it's important part of the strategy and gives us that prefab position in another large capital city market, which is our strategy. We certainly aren't betting the family farm on frame and truss manufacturing, but we think it's certainly a key component of our strategy and another product that's certainly demanded by the residential construction sector, and we need to be a player in that space. From New Zealand's perspective, we're performing solidly and good two-way product synergies particularly being executed in the second half with the launch of the architectural range into Australia. So that's a key initiative for the second half. And then finally, as I spoke about, a little bit of an expansion of our product range in the specialty sector and also in the engineered bridge systems, which has seen us sell our first 3 prefabricated bridges all fully fabricated during this first half. So that's a new product extension to add to the existing bridge products which we've sold in years gone past. Just moving on to Slide 5. So some of this I've spoken about so I'll skip through it. But with respect to the revenue, our view is the diversity of Big River, which we spoke about on the front page, was the key factor in continuing to grow the profitability of the group, albeit that we understand acquisition contributed to that. That's a key part of our strategy. It's been our thesis since Day 1 that we listed the company as we believe there's a very large consolidation play to happen in our space, and we're certainly willing to be part of that. That's helping increase the diversity and the sustainability of our earnings so we're pleased about that. Certainly, the weaker residential markets I spoke about are affected during this period and certainly, probably for the second half as well. And then there was some delays in the large commercial and infrastructure projects which affected the first half, too. Queensland and New Zealand were probably the strongest regions of our 4 regions. That was quite pleasing because Queensland, I think, has not materially grown in terms of the whole market, but we grew our sales on a like-for-like basis so that was pleasing, so too in New Zealand. Whereas New South Wales and our Southern region was certainly behind on a like-for-like basis, but working hard during that downturn to broaden the breadth of the client base and product mix so that when the markets pick up, I think we'll be in a better shape. Certainly, we made good progress there despite the market actually going backwards. New Zealand, we've got a key external facade product which has grown particularly well during the first half. And there's a really strong pipeline of projects there that's typically used in government, institutional and commercial buildings, up to about 4 to 5 stories, so not high-rise multi-res, but certainly, that medium density. It's been a really good growth product, and we think there's some really good opportunities for the rest of this year and certainly next year as well with some lumpy projects in the pipeline. So our segments were certainly mixed during that first half. Formwork was quite strong in the first quarter, but slowed in the second quarter. Whereas building products was quite soft in quarter 1 and then we got some growth in quarter 2. So we saw a bit of a recovery in the alterations and additions market in the second quarter. I think as house prices started to grow again, people got a bit more confidence, then we think the renovations market was certainly better in the second quarter. So that was part of the reason building products improved. And then our ply and specialty were quite stable through both quarters there so no real seasonality as such there between the 2 quarters. From a manufacturing and operations perspective, again, just a few notes. Our supply chain out of China has certainly improved. We're dealing with multiple factories there now across a wide geographic area. And that certainly has helped us during this virus issue there where we're not certainly just relying on one factory. So that's been useful for us in managing the supply chain. And then certainly, notwithstanding that, we've got some new product opportunities out of China, not only for Australia, but for the New Zealand market. So I think there's some good opportunities there for further growth in some specialty products. Yes, the force majeure notification. So we have long-term wood supply agreements with the New South Wales government at both factories, Grafton and Wagga. And we received a force majeure notification with respect to our hardwood contract in November after the fires. And then subsequent to this period, in early January, we also received notification of a force majeure event with respect to our pine log supply at Wagga. So it was a factor, albeit towards the end of this first half. And then a couple of other points just with respect to manufacturing volumes as we've been scaling back our manufacturing exposure over recent years. Still had a decline of around 15% of our construction plywoods in the first half. However, steel and architectural panels and certainly, frame and truss as well, volumes were up in some of those specialty manufactured products. So notwithstanding that overall decline, we still held that manufacturing contribution stable with last year, which was pleasing given the other factors associated with the log supply. And from an acquisition perspective, again, we've spoken about the new acquisition in Adelaide and certainly the 4 that were executed last year performing to our expectations, which is pleasing. And the product extensions that we roll into all of those new sites has gone quite well and all the training on that new product range has been rolled out through all of those new branches. Again, that helps diversify those business and had an interesting anecdote from one of our new businesses who had said, he always lost money in December because it was a short month. But because of the exposure to the formwork market and some of those new segments, it actually translated to a much better result than he'd ever seen, and he's owned the business for some 20 years. So I think that's another example of our diversity, where we are exposed to some of those lumpy projects and slightly different segments to many of our peers, and that certainly helped in that example that business and that's translated across our entire group. So just a quick update on strategy again. Some of this is not new. It's just a reminder of what we see as core to our business model. The 3 in 1 we're referring there to our 3 segments, exposure to both formwork, architecture and specialty products as well as building supplies. Most of our competitors play in only 1 of those 3 segments. Our view is being able to be exposed to all 3 of those market segments under the one roof of each of our sites certainly provides great diversity. It increases the scale and hence, keeps our costs at what we believe is a market-leading position in cost-to-sales ratio. And so that strategy, again, is not new, but it's certainly something that we focused on, and we continue to roll out that expanded range into the new businesses. And once again, we think that's helped deliver a critical result for us in the first half. Growing scale, obviously, that's absolutely critical for our group. We still see ourselves in an addressable market in trade building supplies certainly well north of $15 billion that we're only scratching the edge at circa $0.25 billion revenue. So we need to continue to expand. We've rolled out the acquisition in Townsville and the one in Adelaide to settle soon. And certainly, we have a strong pipeline of other acquisitions, which I can chat about a bit further in the outlook. You have the 3 prefab positions I've already spoken about. That product extension I've mentioned earlier and continue to extract the scale benefits of that expanded range is really critical to the strategy as we roll out additional sites around Australia and New Zealand. And then from a financial point of view, clearly improving the financial results of the company is paramount and it's something we've spoken of for several years. The improvement in gross margin, as I mentioned earlier, in those 3 pots or 3 baskets, I think, was pleasing. And the EBITDA ratio to go up 50 basis points in what was a pretty tough year and -- sorry, tough half and a pretty challenging market to improve the bottom line, EBITDA margin was pleasing. And certainly, we've got aspirations to continue to grow that over the coming 3-year period. That was a pleasing result. And from a targeted product mix there, gross margin at a manufacturing level up despite all those factors we spoke about earlier. So again, that's helped despite the lower volumes, that's helped maintain that EBITDA contribution. So I think the way we've reshaped our supply chain between imports and local manufacturing is starting to settle down well. The new ERP system, which we're rolling out across the group, has been implemented at 5 sites so far with the balance to occur through the rest of the financial year. Again, we think there's good medium-term benefits there in gross margin management, pricing management. So whilst we haven't got any direct benefits for that yet, it's a key project. It's an important part of the overall financial improvement of the business in the years ahead. And the balance sheet has, in my view, been managed closely and well. Still, working capital is a critical part of our business. Obviously, we're working capital heavy so we continue to manage that. And we do need to drive some further improvement in the second half then with small reductions in both inventory and debt is quite achievable in our view and certainly something we'll be striving for in the second half. Okay. So that's the bottom of Page 6, guys. I'll just hand over to Steve Parks, the CFO, and he'll run through the 3 financial slides and then I'll sum up with the outlook page. Steve?

Yes. Thanks, Jim. So just on Page 7 here now with the earnings summary. So just starting at the top there, headline revenue. As you've seen $126 million, up 19% on the previous half year. Actually, before I go through further on those numbers, I'll just, I guess, reiterate what Jim mentioned earlier on there that as with many other companies, this is the first time that we're reporting under the new AASB 16 accounting standards. So we've included both the before and after impacts in the presentation just so that comparatives have more meaning. And all the numbers that we're quoting there are pre-AASB 16. So the impact for us of that through the P&L was to increase the EBITDA by $2.5 million, which was a positive increase. And then we also had some expenses that increased as well, depreciation by $2.3 million and interest by $0.4 million that resulted in a reduced NPAT, taking tax into account there as well of $0.2 million. So when we get into the EBITDA side of things, we've got corporate expenses up slightly though pretty much contained, but up slightly at $1.9 million versus $1.8 million in the previous corresponding period. The manufacturing contribution remained flat at $0.7 million, which is a good result after stripping out those $0.5 million worth of costs that Jim mentioned on some of those lower volumes. Certainly, a positive contribution from New Zealand that saw our overall EBITDA grow to $6.2 million for the half, up 38% over the previous corresponding period of $4.5 million. And our bottom line NPAT there coming in at $2.5 million, up 36% on the previous corresponding half of $1.8 million, so a pretty reasonable result in the circumstances. Moving on to that next page on the balance sheet, Page 8. Trade working capital increased a couple of million dollars from the acquisition of Big Hammer and some increased inventory lines. As a percentage of revenue, it increased 1% to 19% mainly due to the impact of New Zealand, which carries a higher level of inventory than some of our Australian operations. Net debtor days dropped to 56 days from an average of 58 in all of FY '19, which was a positive outcome. Net debt increased to $25.4 million, so a jump of about $10 million on where we were at, at June. That gives us still a comfortable gearing of 27% measured on a debt plus equity basis. And that increase was due to the payment of $14.7 million of deferred consideration from the New Zealand acquisition. So even though we acquired it in June of last year, the actual payment wasn't required until July. And we also had a payment going out there for Big Hammer in August of this year as well for the acquisition we did this financial year. Just in terms of the balance sheet there, again, we've got you both pre- and post-AASB 16. So the impact there, you can see, we've got right-of-use assets coming on board of $18.8 million and corresponding lease liabilities of $19.9 million. Overall impact was a reduction in net assets of $0.7 million. Buried in that lease liability halfway down the page there of $21.9 million is we have AASB lease liabilities of $19.9 million. So our underlying finance leases haven't changed. They're sitting at $2 million, consistent pretty much with where we're at, at June of $2.3 million. On to the next slide there, Page 9, just on the cash flow. Operating cash flow was actually up 40% to $2.6 million compared to $1.9 million in the previous corresponding half. At a cash conversion level, this was 74%, which was similar to the FY '19 full year of 76%, but down from 88% in the previous corresponding period. And most of that is because of the 4 acquisitions that we've taken on board in the last 12 months. They all require a little bit of working capital in that first year. But because we're always acquiring businesses, that always has a bit of an impact and a slight watering down of the actual cash conversion ratio and that's taken into account. Business acquisitions, it's obviously a big number there written in the middle of the page. We've forked out $16.5 million, but that included, as I mentioned before, $14.7 million from the payments in New Zealand and $1.8 million for the payment for Big Hammer in August. And that New Zealand acquisition, that was funded from the issue of shares of $6.1 million and around about $9 million out of our debt facility, which is there for that acquisition purpose. And finally there, just a confirmation that the dividend has been declared for $0.024 per share. That's going to be payable on the 3rd of April. We have a record date there of 5th of March. And that's representing a 66% payout ratio. The company did recently introduce a DRP. So that will be in operation for this dividend and there'll be a 2.5% discount applying. So the last date for those shareholders wanting to elect to participate in that is the 6th of March. I think that's all for me, Jim.

All right. Steve, thank you. So just moving on to Page 10, folks. That'll be the last page that we'll run through. So on the market side, certainly challenging. There's no doubt about that. Our view is that the residential market is, if it's not at its cyclical low, it's very close. Resi off circa 15% to 20% depending on which segment of residential you speak about. So I think it is close to a cyclical low, but the macro trends are all looking much more positive, which you would be well aware of, including house price growth and the interest rate outlook, APRA lending arrangements and certainly bank's appetite for lending all are positive trends. New Zealand, just a word on that first top point. Just worth noting that whilst the conditions in New Zealand certainly remain favorable, we do have reasonable exposure to some of the RV manufacturing players in New Zealand. So if tourism or the transport sector is materially impacted by COVID-19, that may slow that little subsegment that we're exposed to, albeit that it's only sort of circa 10% of our exposure in New Zealand, but there is some uncertainty about that tourism market. The larger project pipeline that was somewhat softer in the first half looks more positive for the second half. Hospital projects, certainly, casino and entertainment projects and there has certainly been a lack of new high-rise residential projects in recent times. So we think that, that large project pipeline looks slightly stronger. Obviously, the fires, I spoke about, it's had circa $100,000 impact on our EBITDA in the first half, so not substantial given the major fire events were in November. Our view is, we will be processing a large amount of burnt wood in the second half. As per our contract terms, the government can go into what they call salvage harvesting, which is to try and harvest those burnt trees, both pine and hardwood I'm referring to now before they degrade. But that doesn't mean that we have to be processing a lot of burnt wood. That does create some uncertainties about the operating conditions, the impact on yield and operating costs and machinery maintenance and so forth. It could be in the order of $0.5 million impact in the second half is our best estimate, albeit that it's a little bit of a moving target, that it depends on the circumstances of every compartment as to what degree trees have been burnt, et cetera. So it's just a thing we're watching very carefully. And then the formply supply chain out of China, as I said, I think we're positioned particularly well as a company because of our local manufacturing assets, because of our European supply chain as well as our diversified exposure to several manufacturers and geographies in China. We think we're in a stronger position as any in the Australian market to certainly be able to still supply our customers' requirements, but there's potentially an advantage versus some of the small importers that we believe our company can capitalize on. From a strategy perspective, as I mentioned, full launch of the New Zealand product range, the architectural product range happening in Q3. That will certainly impact margins at both, our view, gross and EBITDA level positively. Some substantial losses of timber bridges in regional areas as a result of the fires, particularly in the north and particularly down on the south coast of New South Wales, also some in Victoria. So that certainly opens up, and we have a lot of inquiries from various councils and road authorities about our engineered bridge systems. So there's a potential upside there. And the acquisition pipeline, it certainly is strong still. We're looking at acquisitions in all 4 of our sales regions. So that pipeline, particularly to acquire businesses at, in many cases, what are cyclical lows in the markets, we think, is good practice and something that we're working hard on. I guess our dividend payout for the first half reflected that there is strong growth opportunities for the company. So obviously, there's cash required for that. While we do recognize we've had sound financial result and then we do have a strong pipeline of -- or a strong base of franking credits which, we think, it makes sense to also utilize and pass those benefits on to our investors. So we try to balance those 2 factors. With respect to the outlook, there certainly is a few moving parts and particularly the China supply chain is a little uncertain together with our local manufacturing. The construction sector, however, certainly looks better, but we don't really expect any material improvement until FY '21, but we believe the business is very well placed now as the construction sector turns. We've grown our scale. We've grown our product mix and we've certainly increased our diversity, and I believe that will be good for the earnings profile in the future. We don't believe that the second half earnings will be materially different from the first, but given those substantial factors around the wood supply and the China supply chain, there's certainly some doubt out there about how those factors are going to impact us in the second half. But broadly speaking, we expect things to be quite similar and stable through the second half of the year with material market improvements expected from FY '21. So ladies and gentlemen, that's the end of the presentation. We'll leave you to peruse the Appendix in your own time. I won't go through that. So I think if we can open the call for any questions now, you would be most welcome.

[Operator Instructions] Your first question comes from the line of Robin Morgan from Taylor Collison.

Just a few from me. New Zealand acquisitions, Decortech and Plytech, just wondering what progress you've made, if any, at this point in terms of introducing some of that specialist product across into Australia. And if not yet, what's your potential time frame for that?

Yes. So we did cover that in parts there, Robin, Q3. So right now is the launch. The containers arrived from Europe in early February. So the product is here in Australia now and there's a whole range of activities planned with respect to the launch. So all that's happening as we speak, Robin.

Yes. Okay. There's some specialist product that's going across there that you got exclusivity with New Zealand that covers Australia as well. Is that a fair call?

Yes, in some cases. In some other products, we're actually having active discussions with the European suppliers in the next month or so about specific access into Australia. But certainly, the initial range that we're bringing across, which is 6 key products. Certainly, with respect to those products, we do have the distribution rights into Australia as well from those partner suppliers.

And in terms of training up staff here or additional staff maybe that's needed to reach out to specific contractors that are maybe going to be using this, what's the state of play with that in Australia?

Yes. So our Australian guys have been across to New Zealand, done a lot of the product training on the ground with the experienced staff in our 2 sites there. And then vice versa, the key staff from New Zealand has been over and at least done a first round of introductions with some of the key architects. So that is happening. And then obviously, our Australian team in our decorative and architectural sector will obviously be heavily involved in sort of the sales process from now on. So there's been good integration and good interaction 2 ways there, Robin, between the 2 countries and obviously leveraging those years of experience the guys in New Zealand have.

Yes. Just a couple of things on -- a bit more macro, just on infrastructure and commercial project delays that you called out there. I mean do you have a feel for the reasons behind the delays or the likely length of those delays?

Look, probably hard to answer, Robin. I mean, we do have the sort of anecdotes that certainly there's -- well, perhaps I'd give one example. We've got one contract on a large mixed project where we've been on for 55 days and we've been able to work for 29 of those days since it started. Now there's a whole range of reasons for that. There was a lot of smoke and heat, the days that effectively staff weren't allowed on-site. So there was perhaps some of that. Without sort of knowing the detail of every project, I think it was quite a disruptive first half from that respect. Most of the rain, which has obviously been extreme in parts of the East Coast, that's all happened, obviously, in February. So that's really something that certainly impacted things in the last couple of weeks. But for the first half, look, I think there's some issues with respect to a couple of the big infrastructure projects in Melbourne. I think that's quite public about those tunnel projects having some issues and some problems. And I know the contractors are in discussions with the government. We certainly supply those 2 large infrastructure projects in Melbourne. And certainly, they have been a bit quieter and I think the progress on those 2 projects are not what was originally hoped for. So I guess there's examples like that as well, Robin, on the individual projects.

Yes. So a combination of weather, but then obviously, whether it be regulatory or planning and specific project issues as well all combined?

Yes. I think a blend of those things. I mean, we've certainly seen some of our large contractors reduce their staff during the half. So that was a reflection in our view of the fact that multi-res was certainly in decline and even commercial was flat. As I said, we've got anecdotes of some of our customers putting off 50, 60, 70 of their staff as those number of projects started to dwindle. The pipeline, however, looks quite good, large projects. So as I mentioned, I think we're probably close to the cyclical bottom of those various markets.

Just in terms of anecdotes, so appreciate a lot of the lead indicators, the ABS stats, house prices, et cetera, that you touched on there suggest that sort of recovery, hopefully, FY '21. Anything anecdotally that you're hearing from your customers in terms of the running supply that also gives you additional comfort or confidence into '21?