Close the Loop Ltd (CTLLF) Earnings Call Transcript & Summary

Okay. Welcome to Close the Loop's FY '25 Investor Presentation. My name is Daniel Ireland from DataIR, and I'll be hosting the call today. I'll introduce you to Kesh Nair, Executive Director and CEO of Australia; Marc Lichtenstein, Chief Financial Officer; and Matthew Zimmer, CEO of North America. For viewers information, we'll be recording the webinar today. [Operator Instructions] Kesh, I'll hand it over to you to begin the presentation.

Thank you, Daniel. Welcome, everyone. Thanks for joining the call today on Close the Loop's FY '25 investor presentation. As Daniel mentioned, joining me, we've got Marc Lichtenstein, the CFO; and Matthew Zimmer, CEO of the U.S. division. Today's agenda, we've got some strategic discussions, which Matt and myself will cover as well as the financial results, which largely Marc will touch upon. And then we'll look at the outlook, and we'll finish off with some investor queries with Daniel facilitating the Q&A. So business overview, Close the Loop, we're a global circular economy company with 2 key divisions, the Resource Recovery and Packaging. The Resource Recovery division has our ITAD processes where we essentially collect products from OEM customers. These products are end of life. So we go through a refurbishment process and then we remarket and sell this on to sales channels, particularly around the wholesale channels or e-com channels. In addition, we also have recycling processes in Australia, Europe and America, where we recycle printed consumables with the zero waste to landfill brand promise. And we're situated across the globe as well. Moving on to Packaging. We have a full scope of Packaging services for our FMCG customers, anything between packaging design all the way through end product manufacturing. Our products range from reusable flexible packaging, bulk bags and pouches. We also help our packaging customers meet the ESG standards by creating sustainable packaging as well. So overall, we're a company that creates commercial and sustainable value for our global customers through our unique Resource Recovery and Packaging solutions. FY '25 performance, we've had a challenging year compared to previous financial years. This time around, we've achieved a revenue of $195 million with a gross profit of $58.3 million. You can see there's a 29% decline -- sorry, 26% decline, which is largely attributed to soft performance in our ITAD business, which we'll go into later in the presentation. And largely, Marc will be discussing through these points. Most notable, though, we've got the net profit before tax at negative $20 million, is largely due to a number of one-off expenses we have incurred in FY '25. And as you can see, the adjusted EBITDA number is at $18.4 million, which Marc will talk through in the coming slides. So reflecting on the results, here's a snapshot of our business performance. Overall, we've largely experienced unfavorable returns in ITAD products mix. Essentially, we received products where in the ITAD space, we weren't able to achieve the target profit or the target revenue, which resulted in a lower EBITDA. In addition to some businesses underperforming where we have now launched a strategic review, also have some structuring -- restructuring initiatives aimed at operational disciplines as well as looking at increasing overall profitability as we move into FY '26. People are also very key to this business with the appointment of myself and Matthew Zimmer as leaders of this space. We're looking at making the right changes and putting the right people in the right spots to ensure a stronger pathway to success as we move into FY '26. So strategy is key moving from here on. Given the difficult performance the business had over the last 12 months, we've come up with 5 key strategic areas to focus on. These are things like improving cash flow, looking at Packaging performance, increasing ITAD volumes, expanding our OEM market as well as cost efficiencies. So kicking off in terms of cash conversion, we're restructuring to buy as one group, using our group to scale and secure or better pricing in efficient [ reforms ] is critical to the business. We're also looking at tightening up our working capital, ensuring the shorter customer returns. We've got fast invoicing. All these processes amount to compressing our cash conversion cycle, which also increases our free cash flow conversion, positioning us to strengthen the balance sheet. And then we can deploy capital appropriately back into the business where we see higher profit returns. Secondly, Packaging performance. Packaging is one of our strongest divisions. It's got a good cash flow and strong profits. The key focus here will be to strengthen and sustain our brand equity. We're looking at cross-selling into our divisions in South Africa, Europe and also U.S. Linking products and cross-selling is key for our customers. And the focus is simple here. We're here to deepen our relationship with customers. We're ensuring that new customers are acquired efficiently, and we're using innovation to increase our margins in our sales. I'll now pass on to Matthew to talk about our Resource Recovery businesses.

Thank you, Kesh. Our third point is increasing ITAD volumes. We will expand globally by leveraging our partner network and collective selling across the U.S., Europe and Asia Pacific. We also plan to differentiate by combining certified data security, transparent reporting and streamlined logistics to maximize asset value and support our clients' compliance and sustainability goals. Our fourth point is OEM expansion by focusing on key clientele to increase volume. Dedicated account management growth inside the existing customer base is critical by servicing more volume in existing products and adding additional product lines. Also, we want to look at sales presence to expand the number of OEM customers that we have in the portfolio. We will bundle services to increase value accretion within existing accounts. We are also introducing a new centralized test image and standardized operational process, which will streamline global operations. And lastly, we will improve cost efficiencies by leveraging our Mexicali volume capacity. We will shift ITAD product volume to the new Mexicali facility, which will increase operational cost efficiency. The product refurbishment lines in the new facilities have been established with employees in place and ready to scale greater volumes. Management is focused on developing a proper hybrid strategy to maximize value with labor and materials and when value is best to sell as is or to a different channel. The goal is to optimize profitability by touch point. The overall goal is to increase market share inside our current customers, attract new customers under a single account management, data and visibility layer anywhere in the world. I'll now hand over to Marc for the financial statements section.

Thank you, Matt, and thank you, Kesh, for the introduction. The first area I wanted to focus on is the borrowings. And you'll see that there's been a big change in our borrowings moving from noncurrent to current. And you'll ask the question, why has this happened? Well, the key point here is that for the first time, there's new accounting standards that applied at 30th of June. And whilst we breached some of our bank covenants for the March reporting quarter, we were fully compliant with our bank covenants at the 30th of June at year-end. However, the documentation to reflect the bank waiver for March and the new covenant settings was signed after 30 June. And therefore, in accordance with the new accounting standards, the debt has to be classified as current -- the bank debt is classified as current debt at the 30th of June. However, this debt does revert back to noncurrent debt post year-end. And more importantly, we continue to have the ongoing support of our financiers and the debt is not due to be repaid until 2029. So it's merely an accounting standard that causes this change in disclosure. However, you will see that our net debt has decreased compared to the previous reporting period, and this is purely a fact of the cash and the cash that's been used within the business, and that correlates to the movement in our working capital position. You'll see our debtors have decreased. Our inventory has increased, and we'll talk about this in terms of the investment in ITAD and investment in the future. But positively, our payables have decreased quite substantially compared to the previous corresponding period. So the other key point to focus on, on our balance sheet is the movement in intangibles. And you'll see here that the intangible assets have decreased quite substantially compared to the previous corresponding period. Part of that is because of the standard impairment that we occur -- the standard amortization that we occur year-on-year. The intangibles come about as a result of the business combinations and the acquisitions that were made in the previous periods. In particular, it's the customer relationships that we generated, which are an intangible assets. And these intangible assets are written off over a 10-year period. So that caused the intangible assets to decrease. On top of that, we closed down our O F Resource Recovery business in Melbourne, which was the paper and board recycling business. That took effect from the 1st of November, and there were some intangible assets associated with that business, which were acquired to be amortized in full at the 30th of June. Furthermore, at the 30th of June, we're required to do impairment testing to see that the carrying value of these assets have not deteriorated during the course of the year. As we went through this exercise in conjunction with an independent expert, a third party in Leadenhall, we determined that the intangible assets associated with the Close the Loop plastic recycling business in the U.S. should be fully impaired at 30th of June. Accordingly, an increased amount of amortization was taken up, and this goes through the profit and loss statement. However, should performance improve for the Close the Loop plastic recycling business in the future, then that intangible asset will be rewritten back onto the balance sheet, and it will have a positive impact on the P&L as we go forward. So as we turn to the P&L and what has happened in this current financial year, the key point here is, obviously, the revenue was down, and the revenue was down as a result of the reduced performance from our Close the Loop Renewed Solutions or the ISP business, as many of you would be familiar with it as its previous name. That came about as a change in the product mix, and Matt will talk to this in a bit more detail further on in the presentation. Nonetheless, the change in product mix also had an impact on our gross profit percentage and caused a slight decrease in our gross profit percentage. Essentially, the business is gearing up for growth in the future. But as we got into the ITAD space, there was some knowledge and know-how that we were required to gain over a period of time, which impacted the performance in this financial year. The other key point that I wanted to point out is that we have what we call an adjusted EBITDA versus a statutory EBITDA. We incurred $7.6 million worth of one-off or abnormal costs associated in this financial year, and we've added back those costs, which are the one-off costs you'll see in the profit and loss that's on the screen at the moment as well as the costs from discontinued operation, which is the O F Resource Recovery business. So combined, it's about $7.6 million worth of one-off costs that we do not expect to incur in future periods. However, that has impacted the result going forward. And you'll see, as I touched on the previous slide, the depreciation and amortization increasing because of the increased impairment associated with the Close the Loop plastics and O F Resource Recovery businesses. The other key point here is to understand and what we talk about our underlying adjusted net profit after tax. So when we look at the statutory result, the losses attributed to the members or the net profit after tax is $16 million. But when we add back the impairment, and that's the impairment and the amortization associated with the business combination. So really, it's a book entry. It's the write-down of the intangibles over a period of time. We add that back and we add back the one-off costs that we don't expect to occur in future periods, and that gives us an underlying adjusted net profit after tax of $7.8 million. So the true performance of the business, if you like, is that it made a profit of $7.8 million. However, once you take into account all the impact of the accounting standards and the statutory changes that are required to be made, we end up in a large loss position. So -- the next point I'd like to touch on is in relation to the cash flow. And you'll see here that we talk about in the cash flow is the -- what we've always measured as our quick cash conversion ratio, which is running at 92%. And the way we calculate that is it's the cash receipts from customers less what we paid to our suppliers as a percentage of the EBITDA. And you'll see that we -- the net cash position was that we generated $11 million with a statutory EBITDA of $12.8 million, which gave us a 92%. That's an increase in what we had in the previous financial year. It's important to note that our ending cash balance is $32 million, and we still have ample cash on hand to run the business and to take into account the growth that's required in the future from the organic growth as we expand in the different geographies in terms of ITAD and other service areas. The other key point is that CapEx. CapEx really is an FY '24 story in FY '23 -- in '25, sorry, with $3.3 million of CapEx. That's really associated with the Mexicali facility and other few bits and pieces, particularly our Close the Loop plastic recycling business, but bits and pieces across the group. The CapEx has been made in this business. It's now about generating greater returns from the assets, sweating the assets that we currently have in place is the key for the future of the business. The other key point I'd like to make and point out is in relation to the interest paid, and this is a correlation of the debt. If we look at the interest paid that we incurred in this financial year, it was $8.5 million. The net cash impact is $5.5 million because some of the interest got paid on the 1st of July of 2025. But the key point there is that the interest has actually decreased compared to the previous corresponding period. And the reason for that is twofold. One is our bank debt continues to decrease as we've announced in previous updates to the market. We are now paying $500,000, and that will increase slightly during the course of this financial year, USD 500,000 of debt per quarter has to be repaid, which is in line with what was put in place in the original facility agreement when we took it out in 2023. So as the capital decreases, the interest on that is going to decrease. Furthermore, the interest is based on BBSY or the Fed rate in the U.S., and we've seen that rate come down much more than the Australian RBA debt rates. So that's been a positive for us as well. And we expect that the rates will come down, albeit we're not economists, but that's what the market is pricing in the future. So we would expect our interest to decrease over time. Moving forward then, the other key point to focus on is really our capital management. And as I indicated, our debt is going to continue to reduce. Whilst we did breach covenants during the course of the year, the covenants have been reset, and we continue to have the ongoing support of our existing bankers [indiscernible]. We have sufficient cash on hand at 30th of June to manage our capital -- our capital management. And again, the long-term support of the financiers is a key to the ongoing success of Close the Loop. So now I'll hand back to Kesh and Matt and no doubt, there'll be some financial questions as we go forward.

Thank you, Marc. So despite the challenging year, the management team are quite bullish about FY '26 performance. We see the FY '25 year as a year of investing in our growth and scale of ITAD operations as well as streamlining certain underperforming businesses to set us up for FY '26 and achieve a greater profit. In terms of ITAD, we've got great relationships with our customers. They're giving us the opportunity to go into Europe and Asia Pacific. In fact, Asia Pacific, we have already set up operations in Malaysia and Singapore and started to process some key jobs for our key clients. In terms of our Packaging, the key focus here is to go into regions like South Africa and cross-sell. We've got a great sales team, and we're looking to leverage that. And as well as you know people is our main focus. We've got great recruitment processes and hiring great people will continue to drive greater success in the business, and we look forward to keep on doing that as we go into FY '26. With that in mind, I want to pass the mic over to Matt to finish off on the ITAD strategy. Over to you, Matt.

Thanks, Kesh. And building reverse supply chain logistics, Close the Loop is at the forefront of reverse supply chain logistics for the circular economy. By becoming one encompassing solution for our clients, we can win more market share and become a bigger player in the circular economy. This is the reason I actually came to the company. I believe ITAD in the next 3 to 5 years will go through a similar growth to what contract manufacturing went through 20 years ago. Most OEMs have pledged 70% returns multiple times to the supply chain, but the entire reverse supply chain today is built at 10% to 15% capacity. This is about who can design the best reverse supply chain, execute it globally under single account management, data and visibility layer. We need to become product agnostic, leverage our current customers, but move into products that are more than just consumer electronics. The large global OEMs struggle on global consistency. We hear it today from our OEM customers as well as others I've spoken to. And really, I believe that's the vision in terms of where we're going to move ITAD moving forward. I'll now hand it to Daniel for Q&A.

Thank you, Matthew. So now we'll go to Q&A. So we've got quite a few questions. So the first question for Marc is, Marc, can you provide a bit more information on the bank debt facility? Can you explain what occurred during the year and where that facility is now up to?

Thank you, Daniel. So as I indicated, we continue to have the ongoing support of our bankers. And as I indicated previously, at the covenant testing date of the 31st of March, we breached one of our bank covenants. We received a waiver from the bank for the breach of that covenant during the course of the year, and the covenants were reset. And the covenants were also reset going forward. The key point there is that some of the covenants are based on the last 12 months trading. And so hence, because there have been some soft trading earlier in the year, some of the covenants were required to be reset until such time as the trading improves going forward. So as I indicated, ongoing support of the bank, very supportive bank, new covenants set. We complied with the covenants at 30th of June. There's an expectation that we'll continue to comply with the covenants based on our forecast and our budgets going forward. And we do have sufficient headroom in the covenants as well to ensure that we'll continue to comply. And that's really where the bank situation is. The key point was that some of the agreements were signed post 30th of June, and therefore, there's a requirement for some of the debt to be classified as current as opposed to noncurrent.

Okay. We have a question here from Larry. What can you say about cash from operations and CapEx next year? What factors will drive increased cash from operations? Do you anticipate that debt won't increase in FY '26?

Yes. So the overall bank debt isn't going to increase. The overall bank debt is going to decrease because we've got a requirement to pay USD 2.75 million in repayments over the course of the next 12 months. So the actual bank debt will decrease. The cash from operations will improve as performance of the business improves. And that's really going to be a key factor as to -- as the business drives forward. Our Packaging business already produces significant free cash flows. We've seen historically in the ISP business when it performs well, it spits out cash and produces plenty of cash. So we expect that our net debt position will improve going forward, and we expect the business to produce strong free operating cash flows over the entire FY '26 year, maybe not on day 1, but certainly over the full year.

Okay. Another question from Ben. Which new jurisdictions is CLG expanding ITAD into? Which OEM clients is this in collaboration with? And how large is that expansion might be a question for you, Matt.

Yes, we're being pushed globally by our OEMs today. Those OEMs include HP and Xerox are our main ones that we're working on. And both of those relationships are pushing us over to Europe as we speak. And then in connection with cash on how we go build out an APJ environment. As I said before, what most of the major OEMs are looking for in the ITAD reverse logistics space are people that can go take them globally and be able to operate it globally under a single platform. The large OEMs or the large organization I used to be a part of, struggle globally. You start to -- in every region start to act differently. Reporting is different, visibility is different. So we need to build a consistency around our management layer moving forward that everything around that moves. But I also think we have opportunities to move into more hardware-agnostic work in the both the consumer space. And so a lot of the work that we do is inside of Windows, laptops, monitors, printers, those are great products, and we'll continue to keep building on those for OEMs, but there's other products as well as in the ITAD space being able to move up into server and storage, configure to order within region. So really, it's about of our global build-out, which will be absolutely imperative and being able to do that under that management layer, I think, is what's going to attract the OEMs.

We have a question from [ Rahul ]. My first question is about expected guidance for 2026, considering the decline in impairments in 2025 and the condition of the company's covenants and debt. That might be from Marc.

Yes, I'll take that one on. Look, at this stage, we provided no guidance. We will provide guidance as the year -- potentially as the year progresses. We have an obligation and a legal requirement that if there is a plus or minus 5% to 10%, depending on you're looking at profit and/or revenue that we are required to inform the market and keep them fully informed. There's a continuous disclosure obligation as per the ASX listing rules that we're required to comply with, and we certainly will comply with those. Having said that, as the business and as Matt and Kesh take control of the business and drive it forward. It's still too early in the financial year being 6 weeks into the financial year, and Matt's really only been with us for 5 weeks before we can provide guidance to the market that we put our hand on our heart to say this is the number we're going to achieve for FY '26. We're acutely aware of what happens if you miss your guidance. You get heavily marked down for missing it. Nobody does anything if you actually make the number. So we want to be a bit further into the trading period before we would consider providing formal guidance to the market.

Okay. We have a question from Ashley. How much debt in millions of dollars are you forecasting you'll be able to pay down in the coming year? What is the target for net debt in this business? I don't think you've provided that, Marc, but...

No, we haven't provided that. The only comment would be that's disclosed in our financial statements is the amount of debt that we are required to be paid down. 1.875% of the debt per quarter. So effectively works out in the first part of the year, it's USD 0.5 million that were required to pay per quarter, and then it increases to USD 750,000 per quarter that we're required to pay. So it is disclosed in the financial statements and the details. In total, it's about USD 2.75 million that we'd be required to pay over the course of the financial year. And we think that we still have $30 million in cash or $32 million in cash. So it won't be a factor for us.