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

Thank you for standing by, and welcome to the Big River Industries Fiscal Year 2023 Full Year Results. [Operator Instructions]. I would now like to hand the conference call over to Mr. John Lorente, Mr. Lorente the floor is yours, sir.

Thank you, Mike, and thank you all for joining us today on what I know is a busy period for everyone during reporting season. My name is John Lorente, I'm the CEO and Managing Director Results, heading the group. You should all have slides on the webcast. I will go through the headlines of our performance, some background, our historical growth and divisional performance. John O'Connor, our CFO, will go through our financial detail, and I'll wrap up at the end with the outlook for the business. So on to Page 1, performance headlines, which is the third page of the deck. We've continued our growth over the last 5 years with another solid result for the year. I'm happy to report that the business is in a strong position, delivering record revenue and profit results, a very strong cash position and excellent return on funds and returns to our shareholders. Now on that slide on to the headline numbers. Our FY '23 revenue was up 9.8% to $449.5 million, and that's including 2.8% organic growth and solid contributions from our new acquisitions. Our profit position continued to be strong, as I mentioned, a record result. EBITDA up 7.3% to $51.5 million. We've almost all -- we've also maintained a healthy EBITDA to sales margin of 11.5%, which is well above our target of 10% average through the construction cycle. The cornerstone of our result is our healthy balance sheet. Our net working capital to revenue ratio of 15.5% is well within our target range on improved operation performance on our debtors and inventory management. We've continued our growth momentum for our shareholders with return on funds employed at 28.6%, again, a record result, up from 26.8% last year. And our strong cash position has us returning a record final dividend of -- a final dividend of $0.085 and a record total dividend of $0.171 for our shareholders. So on to the second page of performance headlines, our statutory NPAT with our minimal significant items -- given our minimal significant items grew 4.3% to $22.1 million, again, a record position. On to cash position -- what's most pleasing this year is in a volatile market, a strong cash result achieved through disciplined operations across the business, delivering a cash conversion of 112%. Margin growth over the last few years has also been a highlight and this year was no exception. In tough market conditions, we grew our gross margins by 55 basis points unfavorable product mix, inventory management and pricing disciplines. The local autonomy and flexibility of our teams held us in good step through a challenging environment. The team has managed the industry site delays and labor shortage as well and delivered consistently for our customers. We had an increased focus this year on debtor management with a restructured team, which delivered positive results that John will go through shortly. Our 2 new acquisitions, FA Mitchell in Lidcombe, New South Wales and Epping Timber in Epping and Beaufort in Victoria have integrated well into the business and are delivering positive results. Our ability as a business to identify, acquire, integrate and grow these new businesses profitably has been a highlight of our last 5 years trading. Supply chains have largely improved during the year as we cycled out of the cost increases post-COVID, some price deflationary impacts on framing pine, LVL, steel, and shipping from Asia will manage well by the team through prudent stock management and price. On to Page 3. The growth momentum continues. To put in here, as we had last year, a few graphs to show you the growth journey we've been on for several years. What I highlight here is obviously the continued growth in top and bottom line but also yearly increases in profit margins as we improve efficiencies and gain leverage from our scale. I spoke before about our pleasing balance sheet results. On the bottom left-hand side, a strong cash conversion result continuing to deliver consistent cash performance, which flows on the gearing well down this year and giving us plenty of headroom for expansion opportunities. And finally, on the bottom right, we've been able to deliver consistent record return on funds employed, which has translated to positive returns for our shareholders. On Page 4, business overview. Now this is an update on a slide many of you would have seen before. A few points to note by exception. Firstly, I want to note, as we have discussed previously, our geographic market segment and supply chain diversity is a key strategic advantage for our business. This, combined with our local service and national scale, flexibility in autonomy on the ground and decisions close to customers positions us well to manage the ups and downs of our industry. On the center left, working through these by exception, our revenue by construction market has changed on continued growth in our detached housing market, driven predominantly by very strong sales in the first 5 months of the year and continued strong pipeline of work into the second half. Commercial and multi-res have started picking up in the fourth quarter of the year. Also on the right-hand side, in addition, 3 more sites taking us to 26 sites across the business, increasing our geographic diversity in panels in New South Wales and in building Trade Centers in Victoria. On to Page 5, divisional performance. The positive revenue growth across both divisions, both organic and new acquisitions Epping Timber in Construction and FA Mitchell in panels. Construction led the way, particularly the building trade centers on strong growth in the first half and delivered a strong profit result on product mix and pricing disciplines. Panels revenue was up 9.7%, with 1.9% organic growth. The business was impacted by tough market conditions in our Plytech business in New Zealand, coming off a very high result in the previous year. Pleasingly, still a credible EBITDA to sales margin of 14.9% for the division for the year. On to The Grafton, the consolidation project we've discussed previously was delayed on equipment later this year. And lastly, I note the increase in head office costs which is partly to growth, which we'll discuss later on. I'll now pass it on to our CFO, John O'Connor, to run through the financials.

Thank you, John. Good morning, everybody, [indiscernible] that positively impacted this period. Our gross profit result at $123.3 million was -- looking at the next charge from waterfall. This gives a further breakdown of where the increases in EBITDA came from. So you can see the organic revenue from our existing branches was 2.8%, contributing $3.1 million of that movement. Our margin expansion that I talked about earlier from those manufacturing efficiencies and mix and pricing benefits contributed $2.3 million additional EBITDA. The acquisitions, Epping and FA Mitchell, and then the full year benefits of RWP and UBP from the previous period contributed $4 million to the full year results. And our increased operating expenses amounted to $5.5 -- $5.9 million, giving an overall operating EBITDA of $51.5 million. Looking next to the balance sheet. Again, very pleased to report that we have maintained a very strong balance sheet which gives us confidence to continue with the growth and acquisition strategy we have in place. Our inventory levels decreased in the period by $3.3 million. That included $2.2 million, as we focused on reducing residual higher-value imports. As John mentioned earlier, we've seen a big improvement. This is one of the areas where we invested more in people and processes and that additional strong attention has helped us achieve a very solid result. And finally, just demonstrating the strong return we got from our recent acquisitions, it is very satisfying to report that we got 100% of the capped amount. Moving next to capital management. Our net debt decreased from $21.2 million to $11.2 million, primarily reflecting the strong operating cash conversion and after cash was paid out for new acquisitions and the cap consideration payments I just mentioned. In terms of our key metrics, gearing ratio at 8.5% is one of our best ever results and within those historic ranges. It leaves us well positioned for future acquisitions. Our total working capital percentage of revenue remains a focus, as always, and it was pleasing to see this average 15.5% for the year, reflecting the very good year despite the challenges we had in debtor management and the first year working capital requirements of those 2 new acquisitions. And just also confirming the borrowing facilities now reflect the $16 million of additional facilities but our main banker is NAB which leaves us again well positioned to fund new acquisitions. And then finally on this page, confirming our final dividend of $0.085 fully franked has been determined and is payable on the 6th of October. This brings the full year dividend ratio (sic) [ dividend ] to [ $0.171 ] which is plus 10.3% on a year ago, and that delivers a strong payout ratio of just shy of 64%. Looking at our cash flow. Our cash conversion, our OCFBIT number came in at 112%, which was very pleasing given the challenging environment, as I said, in trade debtor management and those first year working capital requirements for the new acquisitions. Our key metrics underpinning that are strong. Debtor days are down. Inventory turns are good, and we've been very pragmatic in our bad debt write-offs, increasing to $1.6 million from $1.2 million last year. Our overall working capital decreased by 6.2%, which compares very favorably to the total revenue growth of 9.8%. You'll see the proceeds of $2.7 million for the Wagga facility, which were received in the first half of the year. Our CapEx was down year-on-year primarily due to those delays in graft and equipment coming on site. We also saw extended delays on securing new vehicles across our car and truck fleet, which impacted those numbers. The additional $5 million of prepping I've already referred to. And then just closing out, confirming the $15.1 million was the dividend paid in the year and then also highlighting those higher tax payments as we settled our FY '22 tax liabilities. I'll now pass back to John, who will take you through the outlook.

Thank you, John. Now I'll wrap up with the outlook on Page 11. So as the headline says, the group's growth is supported by strong underlying demand, in the short, medium and long term with the potential uncertainty caused by what I call the 3 Ls: Labor availability, land releases, loans or funding for consumers and our investors. So given our market segment and geographic diversity, we are best positioned in my view to maximize the upside. On the housing pipeline, it's got a lot of press of late. It's been stretched, as we've said previously, by delays and pipeline is buoyant and extending into calendar year '24. There are strong medium- to long-term prospects for the sector, low vacancy rates, immigration growth and the recent National Cabinet announcement of $3.5 billion investment to build 1.2 million houses, bodes well for the market moving forward. The commercial market pipeline is at record levels across all states and has now started to be delivered. The build-to-rent sector will lead multi-residential, albeit cost of construction, labor and funding will delay in the short term. The medium density work is looking strong and more promising moving forward. Queensland and Western Australia will lead the way, where we have strong market positions in both states. Sydney and Melbourne are expected to be softer, but with some upside with immigration. And New Zealand business is expected to improve on a soft result last year. We go to Page 12, again, continuing on with the outlook. On to acquisitions. As I'm sure you all know, this has been a key part of our strategy and an area where I believe we've performed very well. We have several value-accretive opportunities in the pipeline across both divisions that we are working on, and we will inform the market in due course. As I mentioned, Grafton will be completed by the end of the calendar year and is already starting to deliver synergies and unique product offerings to the business. Our margins, which have grown steadily over several years are expected to be under some pressure over the coming 12 months. We will continue to maintain our pricing disciplines and are working with our supply partners to consolidate purchasing and improve profit margins. As noted, we've made investments in systems and processes over the past 6 months, and we will increase these investments to deliver efficiencies and reset the business for long-term growth. Now I won't be giving you a formal guidance today, but to say that we've had consistent daily run rate -- daily sales run rate over the past 6 months to August. Our view is that this will continue into the next calendar year on our strong pipeline, with, of course, the risk being delays in deliveries, as we have already discussed. Having said that, we are well positioned for continued growth in the medium to long term, and our market diversity strategy will support us to deliver on the upside and continue to deliver strong returns to our shareholders. The next couple of slides, the appendix. So that's the end of the formal presentation. I'll pass it over to Mike for questions.

We will now proceed to the Q&A session. [Operator Instructions] The first question we have will come from Brook Campbell-Crawford from Barrenjoey.

Are you able to just comment a bit more on the outlook. You said the pipeline is extending into 2024. But what are your homebuilder customers telling you about sort of on the growing demand now for new homes, I guess, that will matter once we're through this pipeline [indiscernible].

Thank you, Brook. Thank you for your question. Yes, look, the -- our homebuilder customers have said that the approvals and new orders have declined significantly as the press has already -- you've seen a lot in the press. So that's all I've said in the announcement that it's more unclear next year as to where that is going. But the pipeline is still strong and been extended really in terms of delays as we've discussed. So I think it's pretty clear in that housing space that into calendar year '24, we've got a strong pipeline. What happens after that, you've seen lots of government announcements around trying to ensure that the build keeps on going. So our view is that the medium to long term is strong after early next calendar year, it's unclear. And -- but obviously then we've got the commercial side of our business and civil and medium density, which in my view is growing and also has a strong pipeline.

And just one other question around pricing. Are you able to just provide a bit of color around pricing from your vendors and distribution more for specialty products, not the sort of pure commodity products. Are those price increases still coming through now? Or they've settled down? And what are your expectations over the next sort of 6, 12 months, you stack those vendors to continue to push through prices as we get through this backlog.

So look, -- so I'll discuss the key products earlier. But in terms of -- in general, we've actually seen a marked decrease in the last -- particularly last 9 months on price increases. They more or less stopped who are getting them literally weekly across all suppliers, and they've more or less stopped. And obviously, we've had some price decreases and -- across the imported products. My view is that there will still be some price increases back to normal levels of what we've had yearly price increase from suppliers and at reasonable sort of levels moving forward. That's our view. So we probably saw a lag for, as I said, 6 to 9 months and now people are back to a normal cycle.

[Operator Instructions] The next question you have will come from Matthew Chen of Moelis.

Just wanted to ask about the continued margin pressure that you might see and the kind of extent of it in your eyes? Also noting the comments that you're confident in your strategy to keep delivering EBITDA margins of 10% through the cycle.

Yes, look, there's definitely more margin pressures or pricing pressures with our customers our in the market. Now part of that has been with some of that deflationary impact on pine, LVL and steel. People who are hoarding expensive stock, we've done a great job as a business to decrease and get rid of our expensive stock as those prices went down. Part of our stock reduction initiatives were around moving expensive stock. And I think that gave us a great result. But there are some in the marketplace that have got expensive stock and they're trying to dump it in the market, and that has created more pressures, and I think that will continue. And the second part of that is builders are under pressure on cost savings, and again, it's been well documented on fixed price contracts and builders just trying to ensure that they're able to fulfill their obligations. So my view is that, that will continue over the next 6 to 12 months. And we're working to continue the good work we've done in pricing disciplines in the business and then working with our key suppliers. So we -- across COVID, we actually had an increase in supply partners. Part of our strategy was to go to more partners in the marketplace to ensure we've got supply and the strategy worked. Now that we're on the other side of it, we're looking to consolidate, and we've been working pretty closely with our top 20 suppliers on consolidating supply and with the benefit of some better deals. So my view is that, that will mitigate. And if we do a good enough job, hopefully increase it, but I want [indiscernible] flag the risk of their being after 3 or 4 years of back-to-back margin increases and may be a slight correction in the coming year.

[Operator Instructions] Showing no further questions at this time. We will now conclude the Q&A session. I will now hand the conference back over to Mr. Lorente for any closing remarks. Sir?

Great. Thank you, Mike. And look, and thank you all for joining us today and taking the time. See that's the end of our presentation. I look forward to speaking with you all at the AGM on the 24th of October. Thank you for joining us, and have a good day.

And we thank you, sir, also for your time today. The conference call has now concluded, and thank you all again for attending. At this time, you may disconnect your lines. Thank you. Take care, and have a great day.