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

Thank you for standing by, and welcome to the Big River Industries Limited FY 2023 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Jim Bindon, CEO. Please go ahead.

Hi. Good morning, everyone. Thanks for joining. I know it's a busy time. I think I say this every year, but it seems to be quite a busy day for small cap market announcement. So thanks for taking the time to joining our call. So Jim Bindon is my name and the soon to be forgotten CEO. As hopefully, you've seen in some of the market announcements, I finish up in early March, and John Lorente, you'll hear from him today. He's been with the business for quite a long time, he is going to be taking over as CEO. So John -- and also John O'Connor, is our CFO, will go through most of the results. But you'll hear just a few introductory slides for me and maybe just briefly talk about the transition of the CEO role across to John, and then you'll hear from the guys on the results. So I'm just going to move to Page 3 of the presentation which is headed up 01 Growth Momentum Continues, just to give a bit of background. So I think it's quite clearly or hopefully, from our perspective, it was a really pleasing result. Hopefully, the graphs trying to give you a little bit of a picture of what we've been trying to build over the last 4 to 5 years. When we set our new strategy in place about 18 months ago, one of the key goals was to drive an improvement in the financial results. I think we've built a really good broad base to the business, particularly during a downturn in the construction cycle through 2018 and '19. And we did some hard yards in out restructuring our manufacturing and supply chain, but our view was we had to improve the financial performance of the business. And whilst we've grown the base of the business, which is pleasing and continue the rollout of the expansion, we certainly improved the financial results. So maybe just grabbing the top left of the slide, there you can see the revenue growth. We're coming in at about $233 million for the half, good strong growth here, so it's really up -- sorry, to 20%, but around 11% on a like-for-like basis. So once again, a good thing there is strong contribution from both organic growth and also acquisitions that are certainly joining the Group and have been executed successfully. From an EBITDA point of view, pretty much the same story. So hopefully, if you've seen the headline figures up, up to 31%, again, a good strong contribution and the like-for-like business is up some 19%. And then obviously, the additional contribution from the new businesses that weren't there in the corresponding period. So once again, good contribution from those 2 sort of pillars, to drive that strong growth in underlying EBITDA. Looks like net PAT level, same story. Obviously, there's a minimal or negligible significant items. So statutory net PAT up about 46%. So from a sort of headline point of view, the fact that EBITDA and net PAT are growing well in advance of the revenue growth, that's obviously pleasing. So we're still getting that operating leverage, as you'd expect as we go -- as we continue to grow as a small company and dilute our fixed cost base. Just to on the bottom left corner, cash conversion, again, very consistent. The cash conversion is weaker in our first half and always has been. But this year -- and that's without -- sorry, that's with the pressure that many companies have seen on industry levels. I think we've been out of control that well and get 74% cash conversion, which is particularly pleasing. From a gearing level, once again nothing to say there. I think pretty stable gearing and about 20% or leverage on the basis of EBITDA to net debt or net debt to EBITDA are at about 0.75 or 0.8. So I think obviously, we've got a conservatively run balance sheet, but that certainly leaves good room for growth, I think. And then finally, just in that -- in the bottom right there, return on funds employed, obviously, our target was to get out at 20%. Clearly, we weren't at that level, and that was one of the main drivers for improvement that we're looking for. But the last 12 months, obviously, this is on a last 12-month basis, return on funds employed, but tracking well over 25% now. So I think we're on the word in place to put the investment money where we're sort of generating those type of returns. So that's been pleasing. Now just on the next page, 02 Business Overview. Some of you will have seen this before, so I won't spend lots of time on it, but it's just tweaked a little bit from the last report. So maybe I'll just cover a couple of points on that. So just on the supply chain diversity at the top left there, so these numbers have changed a little bit. So manufacturing is about 20% -- sorry, 21% of our business are products we manufacture ourselves. About 20% is where we have a direct relationship with overseas factories where we're doing the importing and 59% of our revenue is being sourced from local supply partners. That's a little bit higher, a 1/3 of those numbers. The main reason for that is the last 3 acquisitions we've done predominantly have a local supply chain. So all of their purchases are done locally. So that's diluted our direct manufacturing and our import function. The other thing is that the supply chains are largely corrected themselves who wanted a better term and some of that direct importing that we were having to do simply define product. The Australian capacities are adequate now. So we've just tweaked down our direct importations a touch in the last 6 months. That's what's reduced that from 25% in previous presentations down to 20%. And just on the asset mix over the right there, 26 sites now. So I guess the places in there is 7 new sites for the half year. One of those was a panel site in Sydney, which was a big gap in our business. We didn't have a panel position in the larger cities. So that's been a good addition. And then the Epping acquisition, which hopefully you might have seen some price points on in December, which gives us a good prefab Frame and Truss position in [indiscernible], as well as a trade center in Melbourne. Melbourne was actually a market where we didn't have any Building Trade Centers. We got a couple of strong panels businesses, and we got a strong form of Commercial business, and we got a good Frame and Truss plants in the [ Long Beach ], which gives us access to those project homebuilders in [indiscernible], we're certainly waking in Melbourne Metro with respect to the builder market. Now obviously, the addition of the trade center at Epping is a pleasing rounding out of the strategy. So 7 sites manufacturing out of our 26 full Frame and Truss sites nationally now, and that continues to be an area that we want to continue to expand. So pleasing that we've added another one to our portfolio during the 6-month period. And then just back over on the left side, to the split by construction types, largely unchanged. If we split by revenue, you can see, I think it's a pretty nice mix, to be honest, to have 27%, 24%, 23% in the beach coast, frankly it's been a really a meaningful contribution from South Australia and West Australia, 2 of our strongest growth markets from both a sales and a profit perspective. So we're really pleased we've got those 4 sites across those smaller states, you might call them, as well as New Zealand there. So I think a mix across our geographies and across our market segments that continues to be one of the strengths of the business. So guys, that's it for me. Just as a way to inch up. Maybe just 30 second on the changeover to John as the new CEO. Clearly, John has worked for me for 6 years. He's running pretty much all parts of our business under a couple of different structures we had. So now the customer supplies, the staff and, of course, the strategy, which has been -- he has been critically involved with during the last 5 years. So I think it's been a very smooth and easy transition from my perspective. And hopefully, you'll see [indiscernible] and he's touched on the business, but fundamentally, the strategies impact them and we kind of look forward to seeing them continue to roll it out. So John, over to you now to run through some of the results, and then obviously, we'll pass across to John O'Connor for the financial components.

Great. Thank you Jim, and good morning all, and thanks for jumping on the call. So firstly, just -- and covering off the transition, I just want to thank Jim for his leadership over the years, he has delivered as we've seen some great results, but built a high-performing team and a great culture. It's a privilege to head up the business from the 1st of March after a few years -- after several years in the business and be able to present some good results. So if we go to Slide 5, which is headed 03 Performance Headlines first half '23. And maybe putting a little bit more flavor to what Jim mentioned earlier. So with continued strong revenue, up 19.9% to $232.4 million. Growth, organic growth of 10.8% across both our divisions, Panels and Construction Group. Strong contribution also from the 4 largest acquisitions that we executed in the half and that we executed in the previous period. The underlying EBITDA was very strong and grew above revenue. As Jim mentioned, our operating leverage up 31.2% to $28.2 million or up 19.4% like-for-like. A record EBITDA margin of 12.1% of sales is well above through construction cycle average target of 10%, which is a great result. We managed working capital well with net working capital revenue ratio at 17.7%, with good management of our inventory and our receivables. Jim mentioned our return on funds employed at 28.2%, up 71% than the prior period, which was at 16.5%. So again, a great result. And this allowed us to deliver another record interim dividend to our shareholders of $0.086 per share, up 56.4% on first half '22. If we go to Slide 6, which is headed 04 Performance Headlines. So it's pleasing to be able to deliver continued strong organic growth from the business despite the challenges that's been within the market, particularly with the site delays and some labor shortages. So as I mentioned before, that organic growth of 10.8%, are well above the analysis of our addressable market growth, which is circa 4% growth. Our strategy for growth, diversity geography segment and supply chain is in our view, delivering these results. Our geographical diversity delivered strong results from Queensland, WA and South Australia, and those markets are looking very strongly moving forward. The Construction division's Building Trade Centers with the good performance, up 31.7% were up 18.5% like-for-like with most builds still reporting strong order books and a positive view on forward pipelines. Our margin management continues to be a good use story, up 116 basis points versus the first half last year, and this is due to strong operating efficiencies, particularly from our Frame and Truss businesses and the product mix. On the right-hand side there, supply chain pressures have mostly eased in Q2 and particularly from Asia, and slowdown from Eastern Europe, but we expect some further improvements in the next 6 to 12 months. Given the potential risks, we've had some very strong focus on debt management with a restructured team delivering improvements in day-to-day and it has been a good result. And the acquisition strategy will continue and there I believe our business has done really well over the years and there's a competitive advantage and FA Mitchell came on board and Epping times that's completed in the first half and both are performing very well. Our costs have been managed very well and broadly in line with sales growth in line with sales and have been predominantly variable in nature. So if we go to the next slide titled by 05 Divisional Performance. For the Construction division, strong performance from the Construction division, up 20.9% in revenue or 12.8% like-for-like. As I mentioned before, this was led by the Building Trade Centers up 31.7% with a strong order book well into FY '24. The format in commercial was also up, but impacted by some delays with a very strong pipeline of commercial and multi-res work, which we expect to grow strongly in the next 12 months. And margins were up, as I mentioned before, on operating efficiencies, particularly from the Frame and Truss sites and the product mix. Panels revenue was up 17.6% or up 5.9% on organic growth. Strong performance from most sites and from our acquisitions. Now this was offset marginally by the Grafton and result of the consolidation project was delayed in the softening of the New Zealand market. Just one thing to point out, maybe on the -- in terms of EBITDA margin, across both of those divisions continued strong EBITDA margins and our diversity delivering strong EBITDA margins across the entire business. Now I'll pass it on to John O'Connor, our CFO.

Thanks, John. Good morning, everybody. So just starting off on the profit and loss, Page 6. As mentioned previously, our revenue grew just under 20% year-on-year, driven by that strong organic growth and the additional acquisitions that positively impacted the period. Our gross profit result was $64.3 million, which was a 25% improvement on the prior period. This result was driven by one, improved manufacturing efficiencies achieved at our Frame and Truss facilities in South Australia and Victoria. This, coupled with the benefits from pricing and some higher-margin imported products helped us deliver that 116 basis point improvements in our gross margin numbers. With our continued focus on strong cost controls, we saw our operating expenses, that's our cost of doing business, increased by 21%, which is broadly in line with our sales growth. So overall, and very pleasingly, we achieved our highest ever half year EBITDA result of $28.2 million, a 31% increase on the prior comparative period. Our overall finance costs were in line with the additional borrowing we put on to fund the acquisitions and, of course, reflecting the higher interest rate environment that's currently in place. The resulting NPAT number was $12.8 million, an increase of 46% on the prior comparative period. I'll just point out in the presentation, it includes in the appendices, our half year results over the last 4 years. Should you wish to look at those? Looking next at the profit waterfall. This waterfall chart just gives a further breakdown of where that increase in EBITDA has come from. So you'll see that our organic revenue growth from our existing branches was 10.8%, and that contributed $5.5 million of the additional EBITDA. The margin expansion that I talked about earlier on manufacturing and product mix and pricing benefits contributed to $2.5 million additional EBITDA. The acquisitions happened in FA Mitchell and then Revolution United from the previous period contributed $2.5 million for the first half results. Increased operating expenses amounted to $3.8 million, which had an overall operating EBITDA result of $28.2 million, which is up 31%. Looking next at the balance sheet, again, very pleasing to report that we've maintained a very strong balance sheet, which really underpins the growth and acquisition strategy that we have in place. Our inventory levels grew in the period of $7.7 million, and we believe these are sensibly contained in light of the increased revenue. As John mentioned earlier, we've seen a big improvement in our supply chain and believe most of the sort of major supply routes are operating near to normal now. We also continue to maintain a strong disciplined focus on our debtor management. We see no material change in distressed customers, but we continue to manage that risk effectively through a combination of trade insurance policies we have in place and then increased provisioning we have in place on our debtors as well. The additional debt drawdown of $5 million was for the Epping Timber acquisition, which closed in December. And then finally, on this slide, just demonstrating the strong return we have got from our recent acquisitions. It is very satisfying to report that the contingent considerations paid in the period were at the cap demand in all instances. Looking next to capital management. Our net debt increased from $21.2 million to $29.1 million, primarily reflecting the cash paid for those new acquisitions and the cap consideration payments I just mentioned. In terms of our key metrics, which Jim alluded to on the first slide, the gearing ratio at 19.7% is within our historic ranges and lower than the prior comparative period. The total working capital as a percentage of revenue remains a focus, as always. And again, pleasing to see this average 17.7% for the half despite that additional inventory and the first year working capital requirements for our 2 new acquisitions. Also satisfying to note we have agreed $16 million of additional facilities with our main bankers NAB, and that leaves us well positioned to fund new acquisitions in the future. And then finally on this page, confirming our interim dividend of $0.086, fully franked has been determined in respect to the first half '23, and that is payable on the 29th of March. This is a 56.4% increase on a year ago, which delivers a balanced payout ratio of 55%. Moving then to the cash flow. Our cash flow conversion, which came in at 74%, which was slightly ahead of the prior period. Again, this Epping place has given the growth in inventory and the first year working capital requirements for the new acquisitions. Our working capital, net of those acquisitions, grew by 8.1%, which compares favorably to the organic revenue growth of 10.8%. We received proceeds of $2.7 million for the Wagga facility that we'll receive in the first half, which will offset against CapEx of $1.6 million on this chart. I've mentioned the additional $5 million drawn for Epping and then closing out, confirming the $8.1 million dividend paid in the first half and then also just the higher tax payments as we settled our FY '22 tax liabilities. I'll now pass back to John, who will take us through the outlook.

Great. Thank you, John. So we'll go to Slide 13, that's labelled Page 11, Outlook. So we still have a very strong residential builder order book and project pipeline and are expected to continue into FY '24. The civil market is very strong and the pipeline that's continuing as well. The operations in additional market is starting to see some softness, but this is being offset by very strong commercial and most residential pipeline. And this is across all states. Project delays due to labor constraints and weather. We've seen that across the market. Our commercial delays, these commercial jobs, in particular, have been delayed across the East Coast due to weather events, and they're expected to be delivered later this year. The residential pipeline clearly is managing jobs, several jobs on the go and trying to reduce how many to managing at each time. One of the lines I've heard was that, we used to take 200 days to build it out and now to 300 days. And so that's extending delivery of projects. And multi-res projects, as I mentioned, will be extended well into FY '24. In our view, that this will be buoyed by migration, returning back to pre-pandemic levels. We fundamentally don't have enough housing in Australia and at some point, this needs to continue to grow, the construction is to continue to grow. Our costs have stabilized. So decreases from overseas have been offset by some of the local increases with far fewer than we had previously, and we don't see any significant change in our cost base moving forward. If we go to Page 12, outlook strategy and financial. So the strategy as the new CEO and have this question from a few, we're maintaining the current strategy. I've been part, as Jim mentioned, I've been part of developing it over the years and delivering it. It's the right direction for our business. So we'll continue with the key strategy with the 2 divisions focused on our customer and market segments, our acquisition strategy and organic growth and our diversity, geographically supply chain and supply chain is our competitive advantage. So that will continue. On the acquisitions, we have a very strong pipeline across both panels and construction, and we are in a position to deliver a further acquisition within the next 6 months. The Grafton and consolidation project that we've been talking about the last couple of years is almost complete. It has been delayed. And that, as we mentioned earlier, has impacted our results in the panels division, we should see synergies starting to be delivered later this year. We lost a week in December due to -- we lost a week or a week was delayed with builders basically going on leave early. And in January, they started back late. But generally, pleasingly we're still above last year despite this, and then we saw the run rate improved late in January and then into February, and we expect that's going to continue. So the outlook is pretty strong. We expect to be in line as with the second half '23 consensus forecast after new acquisitions contribution. And that's the end of the presentation. I pass it back to you, Sarah, for questions.

[Operator Instructions] Your first question comes from [indiscernible].

Jim, congratulations on your tenure with Big River, you've certainly done a great job. If you don't mind, I'll just start with just talking about the outlook. John you just commented there that late Jan and February had a strong run rate. So the result itself here, at least for me, you did surpass my expectations. So when you comment that in the second half, do you expect to be in line with this forecast. Do you expect a slowdown relative to the first half?

Yes. So more than likely a slight slowdown to the second half, yes, but putting in line with those consensus forecasts, yes.

Okay. Great. And you mentioned in the first half that organic growth was 10.8%. I'm just wondering if you can provide a little breakdown just between price and volume growth across the businesses, if possible?

So the margin growth this year was -- primarily came from those manufacturing efficiencies in the Frame of Truss. That was about 50%, 60% of that. And then we estimated the price and mix was sort of mixed about 20-ish.

Okay. Great. That's great. And so just 2 more, if you don't mind. The Construction Products division is quite strong. So I'm just wondering if you can provide a little breakdown between Building Trade Centers and formwork in terms of the EBITDA performance in particular?

So as we mentioned -- so on the revenue side, it was 31.7% for Building Trade Centers and around 6% for the formwork. I would like to describe the numbers for you on the [indiscernible] I will come back to afterwards on that breakdown, certainly, the Frame of Truss plants team is here, so they'll grab the 4 sites there or the 4th one only came in, in December. But certainly, there was really strong profit growth, as John mentioned, in terms of those improved efficiencies from the Frame and Truss side. So that was certainly a significant part of the profit growth out of the Construction division, which as you just saw was very healthy. The former commercial sites performed well, so they certainly didn't go backwards, but probably the strongest driver of that overall growth in construction playing out of the Building Trade Centers for sure and the Frame and Truss plants were a significant part of that.

Great. That's actually fine. Sorry, if I just circle back just to the first question regarding the guidance and the small slowdown in the second half. Where you are seeing that? Would that be Building Trade Centers just keeping it higher residential exposure? Or where do you expect to be -- I guess, the bit more material impact to be?

Yes. So, as I mentioned, the -- our views on Building Trade Centers continued because we have a very strong pipeline in place and will go well into FY '24. So I think it will be partly that. And I think the other part will be a commercial -- the form of commercial there's several jobs that are ready to come out of the ground. So both those areas and that panel is still performing well. And hopefully, we can get some of those synergies over the Grafton site.

Your next question comes from [ Matthew Chen ], who is a private investor.

It's Matthew Chen from Moelis. Just wanted to ask, I think in the past, you kind of called out that your outlook was underpinned by extended pipeline. Can you give us an update on like construction capacity constraints and how that pipeline is looking in that context?

Yes. Look, taking here, I might partly answer that, and John can go around in the bit on I missed. But as just John said, certainly on the housing side, which gets the most press, obviously, everyone's been reading about the lot apparent slowdown into tax housing. As John said, that's not what we are seeing. The trade centers, which is a part of our business most exposed to residential housing. That's actually been the strongest growth part of our business in the last 6 months and the orders are still solid. Now what we did see from a couple of just to maybe give you some analogy with some individual builders deferred between 60 and 90 jobs with us in and around Christmas. So if things roll smooth and there was plenty of trades and the slabs were ready, that would have been taking those products from us to put the frames up. They actually pause on that because Christmas was approaching and shorter on trades. So that's pushing out that pipeline that John spoke about. So in our trade center side, even though that's where people are expecting housing to slow, we still feel very confident about that. So that's a bit around market capacity because some of that extending that pipeline is about those very factors. It's about access to trades. We've got a waiting for slabs to be board before obviously frames can go up. So just the scheduling of all those trades when things are tight, that has certainly held up some builders again, John gave the analogy of 200 versus 300 days as a back of the new cost or from one particular customer. So hence, why John keeps saying, yes, we believe that pipeline will extend well into 2024, and that's when we see the commercial and high-rise markets, particularly improving because whilst there's great tenders and our contractors, they've got to give the order book, a lot of those projects are either about the start, have been delayed or only just coming out of the ground. So it's that part of the business as well that we expect to be strong across the rest of this year, but also into next financial year.

That's great color. And just a follow-up, then in terms of margin growth, do you see any kind of more opportunities to derive manufacturing efficiencies that you've called out? And what are the kind of opportunities further price increases, how do you think the market is kind of positioned for that?

Look, I don't think that will be material in terms of growth. We've had 3 years of substantial growth. But I do think through the Grafton consolidation project, we will be gaining some efficiencies there, which will help the margins Yes. And I think the diversity across our business and one of the areas where we've grown is that whether we go manufacturing with a local supplier or overseas, we've been able to somewhat pick and choose and get the right mix and that's improved our profitability. So I think that will continue as well.

Thank you. [Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Bindon for closing remarks.

All right. Thanks, guys. We can certainly appreciate the 30 minutes of your time in a busy day for you. Look, I think the business has performed well. We really appreciate your support as investors. And as I move on to something else, I'll be hearing from the sidelines as a significant investor still in Big River and look forward to the 2 Johns and their team continuing the growth that you've seen in this outlook. So thanks very much guide for joining, and have a nice day.

Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.