DGL Group Limited (DGL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the DGL 1H FY '22 Results Presentation. [Operator Instructions] I would like to now hand over to Simon Henry, Founder and CEO. Thanks, Simon.

Thank you very much. Good morning, everyone. I'm Simon Henry. I'm the CEO. I'm the founder and the largest shareholder of DGL. On this call with me this morning is Ben Halsey, our CFO. Let's turn to Page 3. DGL is a sizable company now operating throughout New Zealand and Australia and trading around the world. We are a vertically integrated chemical management company. DGL has divided up into 3 main segments: Chemical Formulation and Chemical Manufacturing; Chemical Storage and Distribution; and Environmental Treatment Services. Let's have a look at some of the numbers that show the scale. There's nearly 500 staff. There's assets of $416 million, we operate from 54 sites stretching from Darwin to Christchurch. We had an annual throughput now in excess of 1.5 million tonnes. We have 140,000 tonnes of our chemical storage capacity. Let's turn to Page 4. There is a snapshot of our financial results. Revenue now -- sorry, one moment. Our employees, you'll see there have risen from 290 to 486. Active customers have risen from 1,300 to nearly -- to over 3,000. Trucks, 56 to 176, and properties that we own or lease and operate from 30 to 54. So the group is growing strongly and will continue to grow strongly. The last 6 months, we've acquired 7 businesses. Those businesses have been successfully integrated into the group, and are all performing well. Let's turn to Page 5. Some high-level financial numbers. Revenue, up 55% at $143 million; EBITDA, up 59% to $20.6 million; normalized EBITDA was $22.9 million, up 77%; and net profit after tax is up 70%; our operating cash flow was down 8%, mainly as a result of carrying additional stock and increased receivables; total assets now are $416 million, up 50%. Let's turn to Ben, our CFO will take it on here.

Thanks, Simon, and hi, everyone. As Simon highlighted earlier, we have delivered a strong first half result, where despite the fall trading emissions, DGL has been able to prosper and successfully integrate our [indiscernible] business acquisitions. First, however, I would like to take the time here to recognize the tremendous effort of all of the employees across the group. Dedication and commitment has allowed DGL to achieve these results that we have the pleasure of releasing to you today. Turning back to the presentation. Pages 3 and 13 outline the financial detail of these results. I will talk through each page, starting with group performance. Turning to Page 7. The group has reported fourth -- first half revenue of $143 million, 183% up on statutory prior comparable period. Following on, EBITDA is also significantly up. The group has achieved first half EBITDA of $23 million with the reduction of any acquisition costs. This is 141% up on the statutory prior comparative period. Over the last 6 months, there has been strong revenue and EBITDA growth across all 3 operating segments with both organic and acquired business contributions. Portion of this increase in statutory revenue and profit is also due to the contribution of the Chem Pack acquisition made on 1 January 2021. Unlike the pro forma results presented on the next page, the statuary result do not include any contribution from Chem Pack or any other acquisition. Touching on some drivers behind this growth. We are continuing to see strong demand for our chemical manufacturing products and services, part of this in response to the global supply chain issues in interim, but we've also seen growth due to climate conditions. We're having the distribution assets continue to be highly utilized. And in environmental, despite the challenges of dispatch, the segment recorded strong converting of [indiscernible] to sales. In summary, and so far, we have largely been able to mitigate the supply chain issues and have been able to successfully procure, manufacture and supply our customers with the product or service they need. On the cost across the group, as we've increased in scale, our workforce in sites, administration clients have also grown increasing related costs as well as the increase in the scale in the group, and some of other businesses in Australia [indiscernible] at the moment. We've also seen cost increases due to COVID, workforce pressure and price rises over the past 6 months, offsetting some of the gains last year. I bring your attention to depreciation and amortization. [indiscernible] $3.9 million relates to depreciation of property, plant and equipment, and a $3.1 million balance related to AASB16 depreciation of operating leases. Overall, we are pleased to have achieved first half net profit after tax for the group of $8.5 million, which is 185% up on the prior comparative period. Turning to page 8. Here, we summarize the first half results and compare these to the consolidated performance of both DGL and Chem Pack over the past 3 years. These pro forma summary have previously been provided on both the DGL IPO prospectus and previous DGL results announcements. The graph outlining sales revenue at the top left shows the organic revenue growth of 29% over the first half to achieve sales revenue of $120 million. First half acquisitions contributed a further $23 million of sales revenue in the first half. We expect an increased contribution from the acquisitions in the second half around the full 6 months of trading. The group's EBITDA has gone to $23 million, a significant increase on the consolidated DGL and Chem Pack $13 million achieved in the first half of FY '21, as well as the increase to the export number, our EBITDA margin has also increased to 16% during the first half. The pie chart on the top right show reduction in the concentration of our largest customer to approximately 10%, down from 19% on the IPO prospectus. Second pie chart also highlights the increasing diversification of DGL's revenue. On to Page 9. There has been considerable growth in the group's balance sheet over the past 6 months. Total assets have grown from $278 million at June to $417 million as of the end of December. We've seen material increases to receivables and inventories, and as we broaden the working capital requirements of the acquisitions, but also due to an expected seasonal build in the general trading environment. A strong last quarter has also contributed to the increase in receivables. There has been a [indiscernible] growth in trade payables, which has partially funded some of this increase to state of inventories. There's been a $45 million increase to property, plant and equipment, much of this increase relates to acquisitions and property purchases. Of the balance, $2 million relates to growth CapEx and $3 million relates to management's CapEx. With respect to the 7 business acquisitions, there has been a $58 million increase to intangibles. The increase in working capital, property, plant and equipment and intangibles have been funded through the premiums and IPO cash [indiscernible], which ended the first half of net assets of $259 million. Finally, cash flows on Page 10. Generated operating cash flows of $15 million in the first half, up from $8.5 million on the statutory prior comparable period. However, as Simon noted earlier, as a result of the increased working capital requirements, the conversion ratio is slightly down on the prior comparable period, I expect this ratio to return in the second half. We've seen $41 million of cash outflows related to acquisitions and $21 million of outflows related to property purchases or development. We drew $30 million from our [indiscernible] during the past 6 months. These facilities have an effective interest rate of 2%. A further $12.5 million of requirements over the use of [indiscernible] in 2021. Overall, across the group, we have group cash outflow of $28 million and a closing cash balance of [ $15 million ]. In summary, we have achieved strong financial results in the first half and are well positioned [indiscernible]. As previously announced, we have upgraded our estimated revenue and earnings guidance to forecast full year revenue of approximately $343 million and forecast all year EBITDA before acquisition cost of $54 million. Back to you, Simon.

Thank you very much, Ben. Now turning now to Page 12. DGL is very much on a growth path. We work in fragmented industries and in a fragmented marketplace and it is our intention to acquire more companies to become Australia and New Zealand's largest vertically-integrated full-service chemical management company. We are seeing the benefits of this commercial structure in our impressive numbers. We have a strong balance sheet, and we have a number of acquisitions in our sites that I hope to be able to announce to the market in the coming months. We are extracting significant additional value out of our -- or return out of our existing asset base. We're able to cross-sell between the various segments of the business and service our broad existing customer base with more services and over a wider geographical area. Let's turn to Page 13. Property and projects. And we have a strong focus on organic growth as well as acquiring new companies. We have a number of property and plant projects currently under development across New Zealand and Australia. And we have a number that are in the planning stages and a store that we signed off for the Board that will support strong organic growth in the months and years to come. We are developing our facility in Townsville and Hawkes Bay in New Zealand and in Christchurch, and are significantly adding to our capacity and services that we can offer our broad customer base. Some of these projects have been held up with some COVID delays. But all in all, we're very happy with the appropriate. Let's turn to Page 14. Health and safety and environmental. DGL is a chemical management company. We deal with chemicals. So obviously, being a safe and well-managed company, ensuring the safety and welfare of our good staff is very important. We have appointed a health and safety director and have started to roll out a well-developed e-learning platform that I think will go a long way to giving us the best possible platform to ensure safety across all our operations. I can report that we have made no significant events, safety or environmental, in the last 6 months. Let's go to Page 15. This is a further [indiscernible] summary and details on our financial position. You'll see here our prospective forecast revenue of $210 million, now upgraded to $343 million, and our prospectus '22 EBITDA of $29 million now upgraded to $54 million. So DGL is continuing to perform very well and growing strongly. I would like to take this opportunity to thank all the good people that work for DGL. It's been a tough 6 months with COVID. Supply problems has been brutal, but they've all stood up to the challenge, and the company has prospered, and I bow before them and appreciate their hard work. Thank you. Let's have some questions.

Are you there, Ben?

I'm here, Simon. The first question we've received has asked what organic revenue growth rate is assumed in the second half revenue forecast.

Ben, do you have that breakdown?

We have assumed a similar rate to the first half as well as contributions from our acquisitions having a full weight in the second half. We expect relatively good trading competition to continue on the back of good climate conditions. And we expect that we have distribution assets to remain well utilized. To that extent, we expect that growth to continue at the rate at this moment. Do you have anything you want to add on that organic revenue growth, Simon?

No. I sort of look -- I look to the growth of -- or the history of DGL, and we -- and our analysis shows that we have grown, or our growth, 45% of our growth has come from organic and the balance from acquisitions. And I don't see any reason for that balance to change in years to come.

The next question we've received is, when do we expect working capital to normalize back to historic levels by June. I'll probably take that one, Simon.

Certainly.

We are keeping into peak production as part of our business and as that -- we are growing our inventory quantities ahead of that sales period. Some of the inventory values have also grown on the back of increases to the raw material pricing. We do expect to unwind some of that inventory on the way back through to June, and we do expect our receivables to fall back down in June. I guess with respect to [indiscernible], we've grown in size and scale. So we probably look at inventory days and dealer days now as opposed to an absolute number, and we do expect those to come back down as we head back towards June.

Ben, if I could add to that, that the COVID crisis and the escalation in the cost of commodities and raw materials is causing major headaches for a number of our competitors. This, in fact, plays into our hands because we have a strong balance sheet, and we're able to buy commodity to supply our customers and formulate where some of our competitors can't. Although it's tough going, we are prospering in this environment because of the way the business is structured.

Next question. We've had the question what impact, if any, has the stronger lead price had on the EBITDA results?

Well, it's been positive if we can find the ship. And therein lies the problem. Trying to export containers anywhere in the world now is hard work, getting pallets and empty containers and getting ships that can visit the -- or transport lead to our various customers abroad is a real challenge. So yes, the lead price is good and has helped us, but you need to set that off against the struggles of shipping.

Yes. I'd just like to add to that as well, we've also commissioned a smelter in June. That smelter allows us to convert some of the goods into hiring high-value products, which we've been able to shift for this period as well, which has also contributed to a positive result in environmental.

Let me add to that, Ben, that the whole philosophy behind DGL is to stay agile and nimble and to respond quickly to any market challenges that might come about from time to time. And this kind of philosophy is putting us in a very good position through these challenging times.

Just on the nose of challenges and raw materials, we've also had a question through. Can you talk through the impacts of the adverse supply issues and what impact it has on the company?

Well, I had 1 speech planned yesterday, then I watched the news when I got home, and I watched the urea price skyrocket through the night, well, as the result of Russia's invasion of Ukraine. So I would expect that you will see continuing turmoil in urea and all sorts of commodities. And frankly, it's too hard to predict where they'll go. But gut feeling is not going to go down anytime soon. We've got significant stocks. We've probably got the largest stock of technical-grade urea in Australia, and we've got strong forward orders. So I think DGL is in a very good position to supply the Australian and the New Zealand market with formulated AdBlue for months to come.

Thanks, Simon. We had some questions of balance sheet nature. The first one is how much headroom do you have on the borrowing facility? I can probably take that one. As [indiscernible], we had used approximately 75% of our current facility. We have a good working relationship with our bank, and we'll continue to work with them to extend our facilities as we require additional debt funding.

Ben, could I ask you to explain the ratio of our current debt to our publicly stated idea that we would be comfortable to go to 3x EBITDA and no higher?

So I guess to that extent, we do have a covenant with our bank and we do have an approach that we're comfortable to go to 3x EBITDA. Over the -- our ratio of the trailing 12 months is approximately -- as at the end of December is approximately 2. So we do have plenty of headroom left in that covenant and that -- we do have capacity, should we require. The next question -- sorry.

Sorry, for the sake of the listeners, I think our debt is approximately 1x EBITDA at this time. Is that correct?

No, it's 2, Simon, 2.

2x at this time.

Yes.

Thank you.

Two follow-up questions to long-term strategy, Simon. In the long-term strategy, when will DGL be considering paying dividends of any size?

On record, and I believe that for the time being, we will continue to invest our earnings where we can see good growth opportunities and acquisitions. Should it ever come to pass that we run out of these targets for projects, then we will start paying dividends then. But I'm quite -- can talk quite bluntly about that there is considerable opportunity out there for us for years to come to grow strongly. So that's where the earnings will be invested at this time.

And a question on a similar note, will DGL be issuing more script for future acquisitions?

Yes, we've been successful with the strategy of using earnings, some debt and some script for acquisitions. And I expect that, that template and approach will be used in future acquisitions.

Finally, a question, what is the outlook for capital expenditure in the second half of FY '22? Any reason that wouldn't be similar to the first half?

Ben, do you have the numbers there?

At a high level, we expect to a slight increase in capital expenditure in the second half. We have some capital projects that we expect to dig into in the second half, for want of a better term. We do face some delays from time to time, though, with respect to supply chain and getting the material or the plants and equipment that we require for those projects. So we are continuing to evaluate as we go, and we remain pragmatic with respect to some of those projects.

Is there a question here from [ Bell Potter ]?

Yes. What is our M&A time line, the pipeline look like in the next 6 months?

Going to simply say, highly active.

Okay.

There's plenty of opportunities out there for us.

At this stage, that concludes the questions that we received.

Any further question?

None further at this stage.

Thank you very much for your time, and thanks for dialing in.

Thank you, Simon, and Ben. That concludes today's call. Thank you, everyone. You now may disconnect.