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

Thank you for standing by, and welcome to the Big River Industries Limited FY 2025 H1 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. John Lorente, Chief Executive Officer and Managing Director. Please go ahead.

Thank you, Mel, and thank you all for joining us today. Joining me today is John O'Connor, our CFO. It is our pleasure to present the first half results for the 2025 financial year. I will go through the business overview and business performance, and then John O'Connor will go through the financial detail. I will then wrap up with the outlook for the business before we get to questions. Now getting straight into it. If we go to Slide 3, business overview. This slide highlights our group's geographic segment and supply chain diversity. I'll focus today on the major changes. So in supply chain, we've seen strong growth in BRI manufactured product moving from 18% to 23% of our revenue, reinforcing vertical integration and providing a strong position amid AUD/USD volatility. The key drivers have been the addition of SLQ, increased Grafton production after the site completion last year and offset by lower volumes in frame and truss. On to revenue by construction market. The residential detached housing decline has seen that reduce to 36% of our revenue due to the market softness. Multi-residential decreased, but we saw some growth in low-density townhouses and a decline in high rise. And we saw a slight increase in the commercial segment. On to revenue by region. We have a strong business mix spread across Australia and New Zealand. Queensland retains our largest footprint, now boosted by SLQ and solid market growth. We are well positioned with Queensland forecasted to be the fastest-growing region in Australia moving forward. Softness in New South Wales, Victoria and New Zealand markets impacted the performance during the period. Our asset mix and the map. We'll continue to review our geographic footprint and asset base to better serve our customers and drive strategies and efficiencies. Over the years, we've successfully amalgamated several sites, including the recent consolidation of Kiama and Albion Park in New South Wales. This brings our total to 25 sites, including 8 manufacturing facilities across the group. We continue to assess opportunities where consolidation deliver value and showing a stronger, more efficient network. Now if we go into the next page, Page 4, divisions. This is an overview slide on our divisions for any new investors. We run 2 core businesses, Panels and Constructions -- Panels and Construction. The Panels business is an industry leader in decorative and engineered panels dealing predominantly with cabinet makers, fit-out trades and OEMs. We've expanded this business substantially over the past few years, both organically and by acquisition, delivering differentiated high-value offerings to the market. We now have 9 sites, including 4 manufacturing sites across the East Coast of Australia and New Zealand. The Construction division is a leading diversified formwork and building products manufacturing and distribution business focused on trade customers. The majority of our customers are builders, carpenters and commercial contractors. There are 3 parts of this business being the building trade center distribution, frame and truss and formwork and commercial business. This gives us a good diversity across segments, buying power and technical expertise. The group remains committed to its strategic priorities of driving growth in key differentiated trade market segments, both organically and through acquisitions, while continuing to unlock synergies and operational efficiencies. Now if we go on to Slide 5, investment highlights. This slide here, we're giving a high-level investment thesis for the business. Now I won't read through all the detail. But just as an overview, we're a diversified vertically integrated manufacturing distributor in a very large addressable market. We focus our efforts on growth segments of the market where we can differentiate our offering. 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 volumes increase. As I mentioned, we have a solid footprint across Australia and New Zealand. And we have circa 600 fantastic loyal staff with long tenure, delivering knowledge and expertise to service our customers. We have a diversified and differentiated product mix. Our scale and supply chain diversity provide ability to pivot when the markets change. We're in a cyclical industry with very positive medium to long-term fundamental growth opportunities. Now if we go on to Slide 6, the performance headlines for the first half. It's definitely been a tough period over the past 12 months. But I believe as a business, we have navigated it well and -- navigated it well and are well positioned as the market starts to turn. The group revenue was $211.5 million for the half, down 3.3% or down 9% like-for-like, off the top of the market in calendar year 2023. Obviously, impacted by a soft residential segment, which is now 30% off its peak and the lowest in more than 10 years. Pleasingly, revenue was up 8% on the second half of financial year '24 or up 3.9% like-for-like. Given the softer volumes, continued delays on site and competitive pressures, gross profit margins have been under pressure. Pleasingly, the gross profit margins were flat on the prior corresponding period and also up 76 basis points on the second half of financial year '24. This was driven by our proactive margin initiatives and product mix. EBITDA was impacted predominantly by volume and was down 26% on the first half financial year '24 but up 17.5% on the second half, indicating we've potentially turned a corner. Our working capital continues to be managed very well at 17.7%, giving the right balance of stock to service our customers, and our cash conversion continues to be strong, 78%. Despite posting an impairment, which we'll talk about shortly, we continue to pay fully franked dividends with interim dividend declared by the Board at $0.02 per share at a 69.4% payout ratio. We now go on to Slide #7, investment and building for the future. Our group's strategic priorities are the safety and development of our people, growth both organically and by acquisition, delivering synergies across our group, improving operational efficiencies to achieve better service for customers, cost savings and best practice and one Big River focused on our culture and market positioning. While we have experienced challenging market conditions, we are focused on growing the business today and delivering results while continuing prudent investment into building for the future. Our investments in the last half have been predominantly customer and market facing to deliver growth and margin improvement, which is around branding and market -- margin initiatives, investment in distribution and manufacturing to deliver synergies such as the new fit-for-purpose site for the Epping business in Somerton and a new PUR laminating line for the SLQ business and investments in support structures, including our data and ERP projects and HR team development initiatives. We also had some robust cost-out initiatives in the first half to rightsize the business given the current macroeconomic environment. If we now go on to Slide 8 and divisional performance. The Construction division with volumes impacted decline in the residential housing and delays made up from a decline predominantly from frame and truss of historic highs, up 2.4% on this -- but it was actually up 2.4% on the second half. And both GP and EBITDA was up on the second half. Our commercial market project pipeline delivered positive growth as projects started to be delivered, albeit in a competitive market environment. As reported previously, lightweight cladding is a growing segment and an area where we have been continuing to grow share year-on-year. And we expect the Construction division to show first signs of volume improvement as the market turns. If we move on to Panels. Our Panels division was up 10.7% with the addition of SLQ but down 8.4% like-for-like. Again, revenue was up on the second half financial year 2024, and margin and EBITDA was also up on that period, indicating a potential turn for the market. New Zealand was the softest market with a decrease in market volumes. Interest rates -- the decrease in interest rates and increasing confidence in our project pipelines bode well for the future. SLQ or Specialist Laminates Queensland is integrated well and extending our capability across the group and delivering growing product synergies for the business. The Grafton site is now complete and delivering higher volumes of bespoke decorative panels and high-value formply. I'll now pass on to our CFO, John O'Connor, to run through the financials.

Thank you, John. Good morning, everybody. Starting with the P&L on Slide 9. As mentioned previously, the revenue at $211.5 million was down 3.3% on the prior comparative period and on a like-for-like basis, 9%. And that was as our key residential markets continue to remain challenging in the short term. Our gross profit result was $55.7 million, a 3.6% decline on the prior period. And while the GP percentage was flat year-on-year, we did see an improvement in that key indicator from the second half of last year. This was driven primarily by favorable mix, good cost management and then just overall better pricing discipline being demonstrated across the business by our teams. However, as I said 6 months ago, the market still remains very contested. Our operating expenses have increased in the period, but on a like-for-like basis, they have been managed well at plus 2.9%. As John mentioned, we did implement a number of cost reduction programs in the first half of the year, and we will see the full benefit of those in the second half of this year. So overall, we achieved an EBITDA result of $14.8 million, down 26% on the prior period. However, up 17.5% on half 2 FY '24. Looking at increases in D&A of $1.1 million. SLQ was part of this as they came onboard. But we are continuing to see increases in right-of-use building assets where, again, we're continuing to see double-digit increases as we get more market reviews in the year. We -- as John said, we have merged a number of sites, and we will continue to look at opportunities as they arise in the future. Finance costs showed a marginal increase against prior comparative period, which was after the additional borrowing costs due to the SLQ acquisition. But this -- the benefit here was due to efficient cash management in the period. The resulting NPAT before significant items was $2.5 million, a 63.8% decrease on the prior comparative period. Looking next to significant items. Following a sustained market downturn and challenging trading conditions, the group has conducted a comprehensive review of the carrying value of its assets, and as a result, a noncash impairment charge of $20 million in relation to our intangible assets has been recognized in the period. The fair value recognized is in relation to SLQ as the business may achieve lower-tier EBITDA targets for the first earn-out period. Moving on to Slide 10, the waterfall. The waterfall chart gives a further breakdown on where the reduction in EBITDA has come from, from the prior period. Now to summarize, with costs well managed and the contribution from SLQ, the EBITDA variance is primarily caused by that revenue reduction. Looking next to the balance sheet, Slide 11. Pleasingly, we can report we've maintained a strong balance sheet, which gives us confidence to continue the organic growth plans and the future acquisition strategy that we have in place. We have continued to maintain strong financial discipline in working capital management. We did see a marginal 1.5% increase in net working capital as compared to June '24. The strong disciplined focus on our debtor management remains, and it's good to be able to report that we have seen a further reduction in debtor days from 39 in the prior period to 37 days. Inventory levels have also reduced in the period, down 1.4% to $71.5 million. This helps us to maintain a well-balanced position while ensuring that we have sufficient stock availability for our customers. The reduction in intangibles is due to the noncash impairment that I referred to earlier, and the decrease of $3.5 million in the continued consideration is due to payments to vendors and the fair value gain that we recognized during the period. Moving on to cash flow, Slide 12. Our cash conversion of 78.4% is lower as compared to 98% in the prior period, and that was primarily due to the unwinding of net working capital after some really strong cash conversion numbers in the prior years. Higher tax payment in first half FY '24 includes payments of tax liability relating to FY '23, which starts to cycle us out of those higher years now. Contingent consideration was paid from cash generated, and we continue to fund our capital expenditure through a mixture of cash and asset financing facilities. Finally, looking at capital management on Slide 13. Our net debt increased by $2 million due to a decrease in cash driven by that lower cash conversion and net increase in borrowing related to additional asset finance. Our gearing ratio of plus 4% primarily impacted by that impairment charge. The working capital to revenue ratio did increase by 1.1% due to that margin unwinding of net working capital after the strong conversion, as I mentioned in prior years. And then finally, the interim dividend of $0.02 per share has been declared, which is fully franked and payable on April 2. I'll now pass back to John, who will take you through the outlook statement.

Thank you, John. Okay. On to the outlook. In the short term, our -- the market conditions are expected to remain challenging, particularly in the residential sector in regions, in particular, New South Wales, Victoria and New Zealand. The Queensland market, which is Big River's largest footprint, is expecting stronger growth. And New Zealand market is expected to improve, which has been driven by reduced interest rates and a higher project pipeline. The medium to long-term outlook remains favorable, underpinned by increasing and forecast population growth, low vacancy rates and government initiatives to boost housing construction. While site delays and labor constraints continue to impact project time lines, market growth is expected to be modest in the short term with acceleration anticipated as the group moves into FY '26 and beyond. The group remains active in identifying and pursuing value-accretive acquisitions that enhance its capabilities and competitive position, and the business remains committed to its strategic priorities of driving growth in key differentiated trade market segments, both organically and through acquisitions, while continuing to unlock synergies and operational efficiencies. That's the end of our presentation. There are several other appendices, slides included for your information. I'll now pass it back to the moderator, Mel, for questions.

[Operator Instructions] Your first question comes from [ John Sanford Hynd ] with Petra.

Congratulations on a good result given the conditions. I just wanted to explore perhaps the outlook statement a bit further. I mean it looks like you're pointing to Queensland as being a lot stronger and perhaps providing a little bit of a tailwind out of the first half. On the basis that the second half has been weaker historically, would you expect the composition of the 2 periods to be like they were historically? Or is there enough of a tailwind for the second half to be even or a bit stronger this year?

Yes. Thanks, John. Thanks for the question. Look, the second half is traditionally a little bit lower in volume because of the number of days. Generally, there's less days in the second half. We expect Queensland to be -- from a volume point of view, to be stronger than the first half. But obviously, there's some softness in a couple of the other markets. So at the moment, we're forecasting a slight -- a slight revenue daily run rate into the second half, and yes, some moderate improvements.

Okay. Great. That's really helpful. And thanks for the detail on the cost initiatives you've put in there. It's great to see the almost 80 basis point increase from your pricing focus. Can you share a little bit more detail what's going on there? What -- I guess what levers you're pulling across what businesses? And can you share -- I guess is there more -- do you expect more to come? Are you halfway through this program, 75% of the way through? What can we -- what do we expect in the second half?

Yes. Another good question. Thanks, John. Look, there's several parts to this program. So margin obviously comes from our pricing -- our front-end pricing. It starts off with our front-end pricing. So we had 110 people through pricing university as we call it, which is basically our work on ensuring that we get our pricing to the customers correct. So that started in July, and that gave us some immediate front-end pricing results. But obviously, it's still been a very competitive market. The next part has been around our manufacturing assets, and we have had a cost down, as John has mentioned, and reduced some headcount and got some efficiencies out of our manufacturing assets, which then will continue. And that's delivered some better cost of goods sold and obviously better margin. And then there's work to consolidate purchasing with suppliers and get LTIs. So look, we're looking again for some modest growth moving forward. It is a tough market. We're really proud of the result being that it's -- at the very bottom of the market, we've been able to keep margins flat year-on-year and half-on-half have gone up 76 basis points. So I still don't think we're out of the woods in terms of the competitiveness of the market. And -- but I think all the work we're doing will be -- will bode well for this next half. And we'll actually -- when the market starts to improve, we'll actually deliver some increased results.

Okay. So you're expecting -- I guess what you're saying there is you're probably expecting a little bit of a headwind from price, but the work you're doing at the moment will probably more than offset that?

Yes, correct. Look, I wouldn't be ready to give a forecast saying that we're going to increase it further, but I don't see it decreasing.

Yes. Got it. I've just got 1 or 2 more. Just on the branches that you're expecting to migrate, I think you said you did 2 to this period. Are there more? How do we think about -- you've got a lot of branches and there's a few assets. Are there more to migrate? And where do we see that cost in the accounts? Was that through corporate cost? Or was that wrapped up in margins this year?

Okay. So I'll take the first one, and I'll pass it on to John for the second one. But look, we've -- over the last couple of years, we amalgamated some sites up in Queensland. Brendale was more or less 3 sites into that big Brendale site, the new site that we have there. We've moved the site -- we've amalgamated 2 sites in Sydney, which was outside in Lidcombe and Smeaton Grange. And then this year, this financial year, we've just amalgamated Kiama and Albion Park. Most of these have been driven by delivering operational efficiencies and also getting out of some maybe second-rate sites that didn't meet our requirements. And so having said that, we are working at our entire property portfolio to decide which sites remain and which ones we may amalgamate. There's no decision being made on future ones, but we still need footprint across each geographical region. And there are maybe a handful of sites that could possibly amalgamate. But at the moment, we may or may not do in this financial year. John, in terms of the costs?

Migrating to the group ERP, how many more sites you do there before we look at cost?

Yes. So the group ERP, we've now had another 2 sites this financial year with the group ERP. There's now New Zealand and another couple of sites in Australia to go. But then on top of that -- and I mentioned about the project Fusion, which was in the announcement, which is the data project. And the ERP is the first stage, and it's about the data. And then we've got a pretty clear road map around how we can get more efficiencies out of our systems once we have everyone onboard.

Great. I guess in terms of answering the cost question, I guess my question is, where do we see those efficiencies that you're expecting? Where, John, do we see those as that roll through? Will that be group-level or segment-level margin?

It will be primarily in the segment level. John, it will be -- look, OpEx is where we'll see it first and foremost. But then the biggest chunk will be in D&A with reduced rental costs.

Yes. Okay. SLQ if I may. You talked about some synergies rolling through with that business. Can you -- given that you've also impaired the asset, can you give us some color there? Was it -- did it hit -- was it hitting the same monthly run rate as it was in a couple of months you owned it in the second half? And how does it compare to perhaps the legacy panels performance for this first half period?

Look, I think that already there's 2 parts to that question. So SLQ, we're comfortable with its performance. But there are a couple of segments, some market segments that have been challenging for that business. So it has sort of 4 businesses -- 4 sort of key market segments, 2 of which being the wardrobe door market and the RV market had been soft. And it got softer over the period, right? So we sort of saw more softness as the year -- as the half has sort of gone on. Conversely, the in-store business, that business hasn't been very strong. And the decorative panels business has been doing well, and we've been getting good synergies of decorative panels from SLQ to other sites. And we've installed a new PUR laminating line to do high-value panels in that site, which then we'll be able to sell across the other Big River or the timber wood panel sites and get further synergies. So my view is that SLQ is the same as the other business. We've obviously bought that recently that is in this market decline. I think it's performing well, and we're comfortable with where it is and where it's heading. Now in terms of the impairment, the impairment is obviously of intangibles and goodwill. Look, it's -- the market's off 30% of its peak in construction. If you look at the last 10 years in housing, we've been doing on average 200,000 building -- on average 200,000 houses a year. We're 20% below that. And obviously, we bought these businesses not on 1 year's performance but on the average over a few years' worth of performance, right? So unfortunately, we've had that impact on our bottom line, and we've taken prudent financial management line -- in line with the accounting standards to do the noncash impairment. So there's no concern on the future viability of the acquisitions that we've was acquired and definitely not for SLQ.

Yes. Okay. And how does it compare -- just to look at the top line, how does it compare to the legacy Panels business, John? Is that...

In terms of growth?

Yes. Did legacy grow year-on-year? Or...

Look, it's similar, but the wardrobe door market has probably been a bit more pronounced than some other parts because of that particular segment, wardrobe doors that go into new housing, where some of the other businesses have got a larger exposure into A&A.

[Operator Instructions] Your next question comes from Rushil Paiva with Ord Minnett.

Just a couple for me. I might just start on the outlook. I know it was asked earlier, but I want to just delve into your comment regarding the expectation of an acceleration into FY '26 and beyond. Just wondering what lead indicators you're currently seeing that are providing you with that confidence that, that will effectively come to fruition over that -- I guess, the end of FY '25 into FY '26.

Yes. Thank you, Rushil. Look, firstly, on the ground, the -- our customers basically have got renewed confidence as to what's coming further forward, right? So the biggest drill back for them, and this is about sales in and people looking to buy housing. The biggest roadblock for them is currently trades and getting enough quality trades to get jobs done and infrastructure, getting water and other infrastructure on to land, right? So as we know, then there's all the macro factors that HIA and MBA, et cetera, have put out in their forecast reports showing growth moving forward. But we're seeing it on the ground in terms of customers telling us that there's positiveness moving forward, and we're seeing it from the associations and their forecasts. And look, my view in this, I said it's not going to be a hockey stick in terms of recovery. I think it's still taking a while to get jobs completed and -- get them started and completed, but there's definitely a requirement for housing moving forward.

Yes. Perfect. On a similar sort of tangent there, just regarding your revenue development, I know in your disclosures you've talked about a sequential improvement half-on-half. But even just looking, I guess, more granular in terms of quarter-on-quarter sequentially, that being first quarter versus second quarter, it did look like your like-for-like sales actually improved again. I think in your first quarter trading update, like-for-like sales are down 10%. And for the half, they were down 9%, which would, I guess, imply that improvement in the fourth quarter of the calendar year. So I just wanted to ask you. Is that, I guess, an accurate assessment? And if so, where are those sort of green shoots coming from within the business in terms of the top line or the revenue development?

Yes. Thanks, Rushil. Look, we probably don't -- we spend a lot of time looking quarter-on-quarter, but I can tell you anecdotally that October, November had reasonable run rates. And usually, that's what you expect out of those months. So pretty good December. December and January are generally difficult months due to the holidays, right? So anecdotally, that's my view. In terms of where the green shoots are coming from, look, Queensland has been our strongest state and continues to be. And we've seen some good performance out of the full working commercial business over the last few months.

Right. Just one last question from me. I just wanted to -- I know the margin of -- your margins were asked about earlier. I just wanted to specifically asked about your gross margin. I wanted to ask just about -- it was quite resilient in the half just gone. But just your outlook for the second half of '25 and FY '26. And I also wanted to ask just your gross margin in relation to some of your pricing comments and I guess the overall market. So that being you're expecting supply-driven price increases. I think you mentioned at the end of the third quarter, early fourth quarter that in the outlook statements, it is pretty clear that the market overall, particularly on the resi side, is still weak. So roundabout way of asking you. Those price increases from suppliers, do you expect to be able to pass that on? Or do you think they will have any impact on your gross margin as we look into the second half and into FY '26?

Yes. Look, good question. And I didn't mention that before. But look, we've had pretty flat pricing over the last sort of 12 months, price costs from our suppliers. And all the suppliers, all the major suppliers have come with price increases into March and April. So interestingly, in similar segments. And I'll say LVL, LVL went down in price over the last 12 months. All the LVL suppliers have gone up more or less all the same quantum. So my view is that if you want to build a house, you need an LVL. MY view is that people will pass it through because everyone's margin has been squeezed. So there's actually benefits with pricing going up as long as we can pass it through because obviously, we've got $70 million worth of stock on the ground, and there's an incremental increase in terms of the value of our stock on the ground. And obviously, there may be some projects where we have to hold some price, but I think they counted themselves out. So the short answer is that I believe, yes, we can pass it through. It's a hard time at the moment. Part of doing the work on the front-end pricing university is about making sure that our pricing sticks in the market.

Your next question comes from Matthew Chen with Moelis.

I just wanted to ask a follow-on about, I guess, a bit of that quarterly momentum. I just wanted to see if that had been sustained in what you're seeing as you've come out of January, that kind of softer period, and return to inverted commons work?

Thanks, Matthew. So January is generally a tough month. The first -- I can say the first 2 weeks of January were very quiet. Lots of customers are taking extended leave, as often happens. And a lot of our staff took extended leave and then got better at the end of January. February is tracking along as expected, in line with our internal forecast. So yes, I don't expect any material change into February or March in terms of the way we've been tracking.

Your next question comes from [ John Sanford Hynd ] with Petra.

One more for me. Just on the inventory cycle, you've obviously managed it pretty well this period. How does -- how do you look now as at mid-February? And I guess I'm noting that it's above where you were first half '24. Is most of the increase SLQ there? And perhaps can you give us an indication on what it looks like ex SLQ?

Yes. Thanks, John. So maybe to the first part of the question, look, in terms of FY '24, we did do a pretty solid inventory reduction. We had LVL and structural timber reduced significantly in price back then. And so at the time, we actually reduced quite a bit of stock. And I think at the time when we announced that result, we said we've probably gone harder than we might have because we're managing margin and then it should go up, right? So having said that, I'm comfortable with the levels that we're at, at the moment. And albeit if it was $1 million or $2 million up from that, I'd be comfortable as well. We've got to get the right balance. We're a business. We're a trade business. And the way trade businesses work, if you're selling into a job site, they'll generally tell you the day before, I need these products delivered to site the next because I have a bunch of trades waiting for it. If you don't have the stock on hand, then you're not servicing your customers. So the stockholding is really important, getting the right balance. And in terms of the way that we balance it is we look at age stock and we look at movement of stock, again, depending on where it comes from, from around the world, either local or international supply.

John, just on the numbers, there's circa about 4 million of SLQ stock. So on a like-for-like basis, again, 68.8 last December, we'd be at 67.5.

Yes. Down just a bit.

Yes.

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

Thanks, Mel, and thank you all for attending. For those of you who aren't aware, we've got our investor road show in the second week of March. So if you'd like to discuss further, please reach out, and we can meet up either face to face or virtually on the second week of March. Thank you.

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