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

Thank you for standing by. Welcome to the Big River Industries Limited FY '24 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. John Lorente, Chief Executive Officer. Please go ahead.

Good morning, all. Thank you for joining us today. My name is John Lorente. I'm the CEO and Managing Director of Big River Industries, and joining me today is John O'Connor, our CFO. It is my pleasure to present the full year results for 2024. I will go through the business overview, business performance and strategy, and then I'll hand it over to John to go through the financial detail, and I'll wrap up at the end with the outlook for the business before we get to questions. If we go on to Slide 3 of the deck, business overview. I'm sure you've all seen this slide before. I'll point out the main changes to our mix. One of the key strengths for Big River is our geographical and segment and supply chain diversity. On to supply chain, we've seen growth in local supply this year to 64% of our revenue as we've consolidated purchasing across the group with our local partners to deliver cost benefits. Supply availability has improved substantially, both from our international and local supply partners. On to our diversity of revenue by construction market. We've experienced decline in the residential detached housing volumes down to 39% of our revenue, driven by frame and truss volumes. Pleasingly, we are now starting to see growth in commercial volumes, as strong project pipelines are delivered. Both residential and commercial are still the largest parts of our business -- of our market segments. On to revenue by region. We now have a great spread of business across Australia and New Zealand. Our largest footprint is in Queensland. We're well positioned, with Queensland forecast to be the largest growth region in Australia in the coming years. Our asset mix in the map on the right-hand side, the acquisition of SLQ now takes us to 26 sites, including 8 manufacturing sites. I note here that we've amalgamated several sites over the last few years and is something we will continue to review, whether it benefit synergies and operational benefits for the business. If we go on to Slide #4, Page 4, Core Divisions. This is an overview slide on our divisions as we have several new investors. We run 2 core businesses, the Panels and Construction divisions. The Panels business is an industry leader in decorative and engineered panels dealing predominantly with cabinet makers, fitout trades and OEMs. We expanded this business substantially over the last few years, both organically and by acquisition, delivering differentiated high-value offering to the market. We now have 9 sites, manufacturing sites, across the East Coast of Australia and New Zealand. The Construction division is a leading diversified formwork in building products, manufacturing and distribution business focused on trade customers. The majority of our customer builders, carpenters and commercial contractors. There are 3 parts of this business being the building trade center distribution, frame and truss and the formworking commercial business. This gives us good diversity across the segments, buying power and technical expertise. As for the Panels division, we are focusing on discrete parts of this large market where we can differentiate our offering. On to Slide #5, Investment Highlights. This slide here is giving a high-level investment thesis for the business. So as an overview, we're a large diversified vertically-integrated manufacturer and distributor in a very large addressable market. We focus our efforts on growth segments of the market where we can differentiate. We have a strong financial profile, delivering positive returns both on profit and cash generation year-on-year, with upside on material cost synergies as our volumes increase. As I mentioned, we had a solid footprint across Australia and New Zealand. We have circa 640 fantastic loyal staff with circa 10-year service, delivering knowledge and expertise to service our trade customers. We have a different -- we have a diversified and differentiated product mix. Our scale and supply chain diversity provides the ability to pivot when the markets change as we saw during the COVID period and supply was scarce. We are in a cyclical industry with very positive medium- to long-term fundamental growth opportunities. If we move on to Slide 6 and then on to the performance -- the results for the year and the performance headlines. The group revenue for the year was $414.7 million, down 7.7% or down 8.7% like-for-like, including the -- or taking out the SLQ acquisition. This was impacted by a soft residential market, particularly impacting frame and truss volumes. Our operating expenses were managed very well in a macro inflationary environment, up 4.1% or up 1.1% like-for-like. EBITDA was impacted by volume decline, and a reduction in operational efficiency down 30% -- 36% off record highs to $32.6 million. Our working capital continues to be managed very well. Following year-on-year improvements, currently at 16.6% of revenue for the year. On to Cash Conversion. What's most pleasing this year in a volatile market is a strong cash result achieved through disciplined operations across the business, delivering a cash conversion of 98.2%. We continue to pay fully franked dividends at $0.075 per share for the year at 78.1% payout ratio. Now if we move on to Page 7, Progress on Strategic priorities. This is a slide I put in the last results announcement, and just a quick overview of some of the work we've been doing. We'll continue with our proven and successful strategy of servicing our trade customers, growth in share, both organically and by acquisition, and leverage our scale while delivering local service excellence. The focus this year has been -- this year in a challenging market has been to manage the metrics tightly, growing share in key market segments. We've continued to invest in the business to deliver scale benefits, operational efficiencies and synergies. The safety of our people is a key value for our business. We have accelerated investment in safety initiatives this half with external audits, site improvement, toolbox talks and training. Two of our sites have achieved 1,000 days LTI-free in July and 1,500 days LTI-free in our Panels business in Penrose and New Zealand, a fantastic result. We appointed 3 new executives to the year as part of our planned investment in growth. Scott Barclay has been appointed the EGM of panels; Gareth Watson has been appointed the General Manager of Supply Chain and Manufacturing; and Damien O'Loughlin has been appointed as the EGM of business transformation and technology. These appointments add extensive experience to the business and are responsible for delivering strategy, driving growth and best practice. In a soft market, we've made excellent progress in organic growth initiatives, particularly in lightweight cladding and in flooring. We acquired Specialised Laminators Queensland, who joined the group on the 1st of May 2024. The business has integrated well into the group, given its aligned culture and strong capability. There are good acquisition opportunities still available as we continue to look to add quality strategically-aligned and value-accretive acquisitions to our group. We've made significant investments in business and processes, delivering operational efficiencies for the business, including the continued rollout of our ERP system. We've had good progress in our supply chain initiatives to align the business and realize scale benefits with upgraded and consolidated 3 sites in Brendale, Sydney and Grafton. And lastly, One Team Big River, we've rolled out our branding in the third quarter and are aligning our marketing initiatives across the group. If we move on to Slide 8. And again, a similar slide to what you've seen previously, just an update on the branding process. We are now well underway, having launched in February, with the first site upgraded being the Grafton upgrade grand opening. This initiative has been strategically important, both for the staff and for the market, raising our profile and unifying the business. All our digital platforms and marketing are now on new brand. The major costs we will [indiscernible] rebrands across FY '24, '25 and '26. We now move on to Slide 9, the Historical Performance. And again, this is a slide you would have seen previously. I won't go into each graph, but obviously, a soft result in revenue this year and profitability driven by challenging market near the bottom of the cycle of historical very strong results in FY '22 and '23. Our fundamentals in managing our cash position is still very strong. Continuing with a 5-year outlook on to Slide 10 and our journey over the last 5 years. We've delivered successfully on our acquisition strategy, acquiring 8 businesses across 13 sites. Have all integrated well, delivering a national network, depth and capability and increased product and service offering. We've expanded our supply chain capability over the last 5 years, growing relationships with international suppliers, consolidating our purchasing and expanding our manufacturing footprint by 4 to 8 manufacturing sites. We continue to expand our synergies and operational efficiencies, which will deliver improved profitability ratios for the business. And on the right-hand side, the 5-year performance. Just a few notes there. So our EPS has grown 6.1%, compound annual growth over the last 5 years. Revenue has grown 10.7% year-on-year, and our EBITDA before significant items has grown 13.5% year-on-year. And the cash conversion, as I mentioned before, has been a highlight the last -- for several years, and excellent cash management has achieved an average cash conversion over 5 years of 99.6%. We now move on to Slide 11, our Divisional Performance. Some soft numbers from the Construction division, with volumes and margins impacted by the decline in the residential housing and delays, decline driven predominantly from the frame and truss segment. Our commercial market project pipeline delivered positive growth in the latter half of the year. As I mentioned, lightweight cladding is a growing segment and an area where we have been growing share year-on-year. Supply chain pressures eased during in the year and are now back to historical levels. On to Panels. Our Panels division is laddering the construction cycle and experienced stronger residential market pressures in the second half. New Zealand was soft, but we have good news, the decrease in interest rates, which may be a catalyst for a market turnaround in the near future. Specialised Laminators Queensland was added to the group. They've integrated well and added capability and synergistic opportunities. And the Grafton site was completed and is now delivering higher volume of bespoke equity panels and the high value formply. And the corporate costs there were managed quite well during the year. I'll now pass it on to our CFO, John O'Connor, who will go into the next slide and run through the financials.

Thank you, John. Good morning, everybody. Looking at Slide 12, our profit and loss. As mentioned previously from John, revenue was down 7.7% on the prior period, driven mainly by that lower residential activity across all our markets. We found FY '24 was still impacted by those labor shortages and site delays, but we've seen that impact easing at the end of FY '24. Our gross profit result was $108 million, a 12.4% decline on the prior period. Gross margin was down by 142 basis points. I think we've said previously -- in the previous years, we had benefited from the growth in that higher-margin frame and truss business. We've had the opposite effect in FY '24 as volumes in this category have declined in line with the lower residential activity. We have also seen increased competitor activity at a general level, which means we've had to be more keen on our pricing just to win business. The market we find is generally more contested. Our operating expenses have increased in the period, but on a like-for-like basis, they've been managed well at plus 1.3%. We have managed to absorb overall wage increases of 4% to 5% in the period and continue to invest in our people and systems, so we're well positioned to deliver on those future growth opportunities. Overall, we've achieved an EBITDA result of $32.6 million, down 36% from prior year. Increases in depreciation, mainly driven by increase in right-of-use building assets, where we have seen double-digit increases on any market reviews that we've had this year. We have started to mitigate those by consolidating some sites where we can, and we will continue to look at opportunities there in the future. Our overall finance costs were impacted by the full year of higher interest rates and that additional borrowing we took on to fund acquisitions this year. The resulting NPAT was $8.1 million or 63.8% decrease from the prior period. Just moving to Slide 13. We just brought back in this waterfall chart, which really just summarizes the previous chart. With costs well managed and a small contribution from SLQ. The EBITDA variance is primarily caused by that revenue reduction and the margin challenges we had during the year. Moving on to the balance sheet on Page 14. Pleasing to report that we have maintained a strong balance sheet, which gives us good confidence to continue with the strategies we have in place. We've maintained a strong disciplined focus on our debtor management. We have seen some stabilizing in the market with not as many distressed customers, but we know from history this can deteriorate quite quickly, so we remain quite focused on how we manage this. Pleasingly, we've been able to reduce our debtor days again from 43 to 42 days. We've also maintained our inventory disciplines, and this sees us delivering a 2.3% reduction in like-for-like net working capital, excluding the SLQ additions. Our borrowings have increased by a net $2.6 million. There was a $5 million of acquisition funding that we took down for the SLQ acquisition, which was offset by a reduction in working capital facilities in New Zealand. Moving to Slide 15 on cash flow. I think as John mentioned earlier, very happy with our cash conversion number. It came in at 98%, which was, like I said, very pleasing given the challenging trading environment and the onboarding of the new acquisition, and this was underpinned by maintaining those strong disciplines in working capital that I mentioned earlier. The higher tax payment in FY '24 includes that final payment on FY '23, which cycles us out of that higher year. Our gross CapEx at $4 million was down from last year at $4.7 million, primarily due to lower spend on Grafton, which was largely in a commissioning phase this year as that went live. And then just closing out on this slide, the $11.6 million dividends paid in the year. Moving on to Slide 16, Capital Management. Our net debt increased from $11.2 million to $27.6 million, the big movements being that prior year income tax liability settlement payments, contingent considerations paid and the additional acquisition borrowings. The gearing ratio at 18.8% is a good result and well within our historic ranges. It leaves us well positioned for any future acquisitions. Our total working capital as a percentage of revenue remains a focus as always, and it was pleasing to see this remaining broadly in line with the prior periods, reflecting our continued focus in this area. And just finally on this page, confirming our final dividend of [ $0.02 ] (sic) [ $0.075 ] fully franked has been determined and is payable on the 4th of October, a dividend payout ratio of 78%, a very solid result. I'll now pass back to John, who will take us through the outlook.

All right. Thank you, John. Now to wrap up with the outlook slide on Page #17. So on to the markets. The residential market has been soft, and we expect it to remain that way for the next 12 months. There are strong medium-term prospects for this sector given the housing demand, low vacancy rates, expected interest rate decreases and government initiatives. The commercial segment outlook for the business remains positive, given solid project pipelines that are now being delivered. Across the regions, Big River is well positioned. Queensland is our largest market and is looking positive. Western Australia is strong and South Australia is looking more positive. New South Wales, Victoria and New Zealand will likely continue to be softer markets in the short term. We continue to look for opportunities in M&A to add value accretive and strategically aligned businesses. We will focus the next 12 months on running a tight business, improving the metrics and growth above market. The business will continue to consolidate purchasing to deliver synergies and mitigate expected increased competition and margin pressures. Our investment in people, systems and processes will continue to deliver scale benefits through synergies and efficiencies across the group. This will position the business well when the market turns. Now if we go to questions.

[Operator Instructions] Your first question comes from Patrick Cockerill with Ord Minnett.

Just a couple of questions on behalf of Rushil. You've commented on an expected pickup in the residential markets come the end of the calendar year '25. What sort of indicators can you give us that are giving you confidence in this occurring?

Look, as I've said there at the end, the residential market in the next 12 months, in my view, are soft. At the moment, we -- there is some -- there are positive signs from a few of the states I mentioned, Queensland, South Australia and WA in terms of our addressable market, and obviously, we've got a bigger footprint in Queensland. I still think it will be soft next 12 months, but in calendar year '25 and the end of '25, most of the associations and analysts are predicting that's when the increase is going to happen. And in those particular states, we do have customers telling us that they're probably seeing it a little bit more positive moving forward. So I still think the next 12 months will be tough for the market, but obviously, those fundamentals in terms of the demand for housing and government incentives trying to grow those numbers, we'll see growth. The exact date, I don't think I can give you.

And then just on the margins. The gross margins declined in '24. Can you give a little bit of color on the breakup of the gross margins in the Construction products and Panels. And that given you've already begun initiatives to improve these margins, how do we look at that in terms of outlook for '25 and '26?

Yes. Good question. So look, I don't have an exact breakup, but I can give you sort of high-level. The majority of -- or sorry, a large portion of the margin decrease was due to frame and truss and the operational efficiencies. Obviously, you've got manufacturing sites with high volumes during the peak of the cycle coming off, and that's reduced that operating efficiency. So that's why we've pointed that out in particular. But then we've seen the margin decreases in the general building trade centers, and then probably followed by the panels division. Probably -- again, every division had some impact in that space, but probably those 2 areas are predominantly where the decline has been. And then into next year, I still think the market pressures are going to continue to be there and there will be more pricing pressure. We are doing -- we are -- we have implemented quite a bit of work on both our supplier purchasing and then on our head count in our manufacturing, which will mitigate that -- and that will help mitigate that. And in SLQ business, we'll have a full 12 months of that, and that's at a slightly higher margin than the majority or the -- than our current percentages across the board. So I think there's some upside, but there's definitely still some difficulties in the next 12 months around margin.

So just last one for me. On the pricing and volume, and given the tough operating backdrop, is there any more info you can give us in terms of how we should be looking at that in the Construction products and Panels and how we should be looking at that into FY '25?

Look, as I said, I think it's going to be tough on the residential side on volumes. And obviously, that commercial segment, I think will grow. And we're looking to grow above the market. So our addressable market is, if you go by the [indiscernible] data, addressable market forecast to be down, but that's not news to anyone. But I think there are segments in the marketplace where we can grow that volume. In terms of price, I don't see a huge increase in pricing over the next 12 months. The market is tight, and I think a lot of the inflationary pressures are probably behind us from probably a couple of years ago.

[Operator Instructions] The next question comes from Matthew Chen with Moelis.

Just wanted to ask about -- if you could say more about potential site amalgamations until this year, please?

Yes. Yes. Thanks, Matthew. Yes, so we've had a few sites move. So the FA Mitchell site in Sydney. And look, that's now with the business in -- the Timberwood business in Smeaton Grange. We've actually amalgamated into a new site there. And John mentioned that was predominantly driven through, one, we had a substandard size in that business we acquired for FA Mitchell and to significant rental increases, right? So I think we're pushing back on some of those rental increases or looking at efficiencies across our sites. So that was one. And secondly, we've had 2 sites and we had 2 sites of Brendale for the old Revolution business. We've now moved into a new site in January, February and also in Brendale, and the SLQ business had an off-site at a second site, and we've actually moved all the product from there into the Brendale site. So they are the 2 main ones. We are looking at amalgamating the [ Kawana ] site and the Albion Park site, again, a subscale site -- [ substandard ] site and that lease will be ending next year. So we're working through that at the moment.

I think one thing to add to that. I think what's clear is that the costs have gone up, obviously, in commercial property. We're talking about synergies and efficiencies across our business. One of them, because, obviously, it's below the EBITDA line, but one of the big costs in terms of NPAT is the rental costs, and we're looking to utilize our sites as effectively as we can.

That's helpful. And in terms of how you guys are thinking for this year around the investments in platform?

Sorry, what? Sorry, I missed that.

Investments in the platform and systems, how you're thinking about both for this year.

Yes. So we're going to continue to roll out our ERP system, Pronto across the sites. Part of that has been around training. So we've done quite a bit of training to align our processes at the branches. And with the aim of that being that we get synergies across our sites and with customers that are multisite and multistate. So I say that's one part, the cyber. There's been a lot of work on the cyber side. We've actually achieved our target maturity level in cyber a year early, but that's going to continue. And one of the areas that is critical this year is the alignment of our data. And having bought a significant amount of businesses over the last few years, you end up with different stock items or same stock items being of different codes and different descriptions. We're going through a robust process of aligning our data so that then we can align all our businesses and then start to drill more into the marks of e-commerce and other platforms.

There are no further questions at this time. I'll now hand back to Mr. Lorente for closing remarks.

Great. Thank you. Thank you all for joining. Our roadshow -- for those of you who'd like to have a one-on-one, our roadshow will be early September. We've also -- I'd like to announce that we've got an Investor Day on the 10th of October in Brisbane, where we'll go and see a couple of sites and have some of management present, one, on our results and, two, on our strategy. So if any investors would like to join, that will be going out shortly. Thank you. Thank you all for joining today.

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