Force Technology International Pty. Ltd. (SGI) Earnings Call Transcript & Summary

Sorry about that. A couple of technical issues, but I appreciate everybody hanging on, waiting their time. So welcome to the presentation regarding the acquisition of Force Technology. There will be a number of questions around this, I'm sure, in regards to its fit and its opportunity for our organization to be able to take that forward. We'll try again. Okay, acquisition. A couple of technical issues, so I apologize. The standard, obviously, disclaimers do apply for this leading our way forward. And look, I guess what this acquisition done is a number of things, which I'll take you through. The Stealth Group Holdings organization today is really -- has a conglomerate strategy. It operates a diverse portfolio in Australia, spanning multiple sectors across industrial, retail and the trade industries. And really, there's 2 main themes that we push and promote towards that is, one is supply and solutions for every workplace. And I guess, with the acquisition of Force Technology, it will be for every person as well. So we do have an ambition to be Australia's #1 market-leading alternative to the majors across those sectors. With Force, it's $159 million combined pro forma revenue for FY '24 with about an $8.5 million EBITDA. And the organization structure, which I'll walk you through, essentially facilitates really big management, strong lead across that, but also penetration through different business units. The key messages, I guess, is this. Force is a wholesale distributor. It has its own private label range. It has exclusive distribution rights. It also has brands that distributes across multiple channels. Its 3,310-odd outlets that it distributes today through retail resellers. The adjacencies to be able to take that business will increase our revenue and margin, our profit in the business and trade sector. So all the Force products will be ranged across the Stealth organization in terms of the business and trade operations in the near future and will be utilized in the retail infrastructure of Force to be able to sell products to those customers. So it adds significant firepower to us and also provides a differentiated offer. I guess the most simplistic tagline that we've put in this is that mobile accessories are native anywhere. So key messages. Every workplaces meant to mobile accessory has cords, and there's a number of different products that we have here from sort of Bluetooth speakers, the phone cases, we've got charging cables. Every office, every environment that is covered has a multitude of cords and a multitude of Bluetooth. There's an audio and cases that obviously gets protected -- or needs protection from an organization perspective because it's a high cost. It does provide immediate expansion opportunities through new adjacencies, and I'll walk you through that, and also to immediately value accretive. So the transaction, 100% acquisition of the shares in Force through roughly $9.5 million. It's less than 4x enterprise value over EBITDA for FY '24 and FY '23. There is an outperformance payment in FY '26 based on the strategies that the vendors and also ourselves within still today are looking to achieve in that period. It's a script offer as well as taking over the working capital facilities that are in place for Force today. So there is no many cash outlay. And the shareholders of Force today will become new shareholders in the Stealth organization, both holding about 12.52% of the total script within the company. Immediately, it's EPS accretive, about 43%. 26% we're forecasting conservatively in FY '25. From a balance sheet perspective, there's net leverage of 1.3x today on a pro forma basis. And in 12 months' time, we're expecting that down to roughly just over 1x. So there are a number of synergies from a cost point of view. We've identified $1.2 million worth of cost savings. There's about $2.3 million of profit gains from new adjacencies, and that's only what's been identified in the short term. The effective date was 1st June. The completion date, we expect to see over the course of the next 10-or-so working days. Collectively, as I said, $159 million in pro forma revenue and $8.5 million in EBITDA, and that's before transaction costs or before synergies or any other growth opportunities. There are 61 existing store locations within the Stealth network today Australia-wide and that combines the assets of company-owned as well as independent operators. The reseller network, which -- this is new to the Stealth organization of about 3,310 stores are Australia wide as well. Most of those are 7 days a week, 24 hours a day in a lot of cases. In some cases, between 12 and 14 hours a day. So to be able to provide a product to our customers, we're really covering every aspect. 90% of all the products that we sell and inclusive of the Force products are really nondiscretionary item. So we're definitely a stronger business today. There's lots of growth opportunities ahead. We're well positioned to take advantage of that. We're really excited about what this can bring. So the combination together, really, it brings manufacturing capabilities in our own private label range. That skills that we don't have in our business today, so that's new abilities. And there's lots of opportunities for us to be able to grow in that area within the existing industrial part of our business. I talked about a consumer division, which is providing these new range of products to new sectors and new channels. And we've also got a large distribution network that, obviously, from a business trade and retail perspective that they -- we can maybe penetrate. So those products currently today are not in those Stealth parts of the business. There is no dominant player that supplies to the business and trade sectors. So we see that as a reason to be able to attract customers to our stores but also be able to provide the customers of Force today with new opportunities that will present itself. That's not about putting the Stealth products into those reseller environments. So it's about providing opportunities and products for the workforce for the facilities that they operate, the warehouses, the transportation and the offices that they have simply people and move all bits of equipment, which is exactly what fits into the Stealth business stream today. So we're operating now 2 key business units. Those business units are essentially split into industrials and consumer. So the theme of everyday products is still consistent. And we obviously have a traditional market of industrials. Remembering that when we started this business some 10 years ago, we're a procurement company. We then moved into the safety area. We then moved into the health care environment, selling first aid products. We then moved into the tooling area. And all of those consumables were needed across every different workplace environment. We then moved into the retail environment by acquiring C&L Tools, and also Skipper Transport Parts, and that created an automotive element as well as a hardware component and construction materials and so on, both online and in-store. So our evolution, I guess, as a conglomerate strategy, which is consistent historically and also demonstrates that we are consistent with our future strategy is that the products Force offers today not only creates new channels for us to be able to provide solutions in those areas, but also it provides an opportunity for us to be able to be the dominant player of these types of accessories within the business trade and commercial area. We can do a bespoke solution to anybody from a large organization with 10,000-plus workers. We can provide a dedicated solution to government, education and the police force. These where there we see every office plot that sits in main city, it's areas, users, all the products that I quickly showed you earlier. So this is a consumable product that has an everyday need. Everybody's got a mobile phone, most people have a tablet, most people have the need to be able to charge their power, whether that be portable or putting it into a wall. And also Sprint protection, particularly in the education sector, where the average repairs to -- about $500 to repair a unit. It takes 2 to 5 days. We know kids drop them. So the projection space for us to be able to provide that as well as all the accessories that go within telco are a massive opportunity. So where I see our divisions then being able to penetrate, so from a wholesale perspective, our supplier and manufacturers of our distributed brands, exclusive own label and private label, that is, the distribution go-to-market offering. Our 2 key channels, as I've said, are industrial and consumer. So they'll cover business trade, commercial and pro. And in the consumer side, retail resellers, in-store online marketplaces and other resellers. So our distribution channel is about combining the products that are available on offer in our portfolio, the industrials and consumer channel being able to push those products into those particular market stream. So as we continue to build our competency in terms of our products and ranging, we'll be able to merchandise those across those key areas. So let me give you a bit of an overview of the Force Technology and firstly, starting up for the market. So it's a $2.2 billion retail market. It's in Australia. It's a $1 billion wholesale market in Australia, which Force currently holds about 5% market share. Our ambition is obviously to grow that quite significantly. I think we can do that quickly to hold more than 10% market share over the course of the next 2 years. The population, interestingly, 123% of the population based on Source Research, has mobile phone subscriptions is about 32 million phone connections and 23-odd million smartphone users. So it's quite a significant news and a range, and they're getting damage in these new versions and cords are always needing replacing, and there's a whole host of accessory items that are coming out, not only in the past, but also in the new service. So it's an evolution of evergreen type of product mix. From a global perspective, it's a massive, massive market. It's -- and continues to grow. And obviously, as the new iPhones, new iPads, the new Samsung are products that are coming out. The Google phones, there's a whole host of different phones and iPads. And when you think about tradings or working on building sites or construction sites, operating on transport yards or mine sites or people working out in market guidance, there's just a whole gambit of growth areas for us that we'll be able to take those products into. So we're really excited about where that can take us. Force today, $44 million in terms of its revenue. It has about 44 staff and was established in 1992. So it's the same founders in 32 years. Over the time, they've had a number of approaches for the people wanting to acquire their business. We actually first started this discussion with Michael Doust and also Jake Minear about 5 years ago. So it's really a 5-year deal in the making, I guess. And over the time, to Jake and Mike, because where they are in their life and their ambitions to go forward, but also they liked the fact about what we could bring together. So this is nothing new. We haven't jumped on it overnight. We're not taking a punt on it. There's some suggesting there has been some change in the telco market, and that's not the core business in terms of distribution footprint. So its massive -- the upside is about utilizing a really solid business that's been operating for 32 years and gone through the trials and tribulations of a whole host of different markets of Force's and market changes. They have a CEO in place. He's been with the company for 10 years, 5 years as a CEO with a really strong management team that underpins that is spread Australia-wide. So there is a distribution center within Perth, and it's been here for 32 years, and that services the market need very, very well. Obviously, that is the main distribution point. And I take a very simplistic view. You've got to have product on the shelf to be able to sell it. Having products sitting in a distribution center doesn't do anything. So the spread across the sales platform in terms of people in every state of Australia, linking in with the existing Stealth network, is absolutely complementary. In terms of its brand mix, so own label products are at 30% of total sales. Private label or bespoke products were almost 19%, excluding distribution brands that they hold taking the market is 36% of all sales, and then there's a balance of various brands to fill in the mix. So that's a really well-balanced distribution portfolio. From a channel perspective, telco's 21-odd percent; FMCG, it is 20%; consumer electronics, 39%; and the independent space and online marketplace, about 20%. So I'll take you into who those customers are. So it actually has a really good spread. There is no other business of its type that is a public listed company. So we're the first to bring that back into the fold and on the market today. And clearly, there's opportunities to be able to continue to penetrate in those markets. So in terms of, I guess, verticals. From a telco point of view, Vodafone, Optus and Telstra have been long-serving customers. Optus has just gone through a whole host of management changes and their business model is altering a bit as Telstra did 3-or-so years ago. So that seems to be an evolution of change. Hence, it's diversified itself into the independent space where a lot of those places have been shopping centers, FMCG, within Coles for the private label brand, that is on the Coles shelf, 7-Eleven stores as well as Big W. From a consumer electronic JB Hi-Fi, Good Guys, fantastic supporters and the product is ranged in all those stores as well as within Officeworks and Retravision. So it has a really nice spread across those consumer electronics industries and then equally on the online sector. So there's about 3,310 reseller stores within that. And part of that is also removing some of the Optus where the change or product mix is altering in the near future. So quality brands, leading businesses, a lot of those are open every day of the week, get a massive amount of traffic that go through there. So Force will continue to expand its range within those, bring out new offerings, new brands and exclusive distribution rights to be able to penetrate those channels, putting more product in more stores across smaller locations is going to be important. And it's something that we're investing in. If you look at Coles, JB Hi-Fi, Good Guys, Big W, Officeworks, all of those companies run big distribution segments. They all have people who wear uniform, they all require head-to-toe protection. They have trucks. They have vehicles that need to be repaired and maintained. And obviously, the products that we sell within those environments, absolutely fitting. So we're not actually going to be putting our products in their stores. We're going to be providing our products on the Stealth industrial side into their workplaces to be able to provide their people and their environments and their facilities with the types of products that we sell. So that's where the penetration obviously comes from. And essentially, fantastic brands to be able to leverage and solidify where our product offering and our growth strategy is going to come from. In terms of the brands, has its own private label brand, which is EFM, and EFM has been involved in a whole host of different evolutions in terms of its brand. It is, for example, in JB Hi-Fi as well as all those other product brands that I mentioned, sorry, resellers that I mentioned, it's a high product, the 30% of their sales is high margin. So obviously, in the business environment, one of the key catalysts would be when we are selling that through our own existing business network, the opportunity to be able to make an extra 30 to 50 percentage points on our margin is one of the key catalysts being able to go in there. So we're not going to compete against our key customers. For example, JB Hi-Fi, Good Guys have a commercial area. We will actually go and support them and help grow those channels for them. But clearly, they don't operate in some of the markets that heat leads does today or C&L Tools or United Tools. So it's about being able to put an offering in those environments as well. With those brands, [ Autobox ] use about $1 billion U.S. business and it is a very prominent brand as a PopSockets. So these brands cover, I guess, anything from a lifestyle perspective as well as a direct necessity. So like our Belkin, Case-Mate and Samsung are great brands to be able to penetrate. People know them, people want them. And even in Coles private label world or like a gold label strategy, the NRG product sits in their stores as it does us a brand exclusively for 7-Eleven. And that allows us to be the manufacturers and the solution providers of that right through to our own label, which we take to market and then representing key brands to be able to penetrate our channels. So they're not all competing brands. They actually complement each other, and it will better be our strategy. So a whole host of different products for not only the retail, but the industrial site. So portable power banks, all charges, charging cables, automotive, there's massive opportunity for our business, particularly our whole strategy is about being able to attract the customer. So this is not just about the product, it starts with the customer first and foremost. And it's everything from head to toe, everything that's portable, everything that's mobile, and that can be a vehicle, that can be a personal protection. It can actually be accessible. We're more accessible today than ever in terms of all the devices that we have. No matter where you are, you need to support, you need the protection, you need the technology, you need the audio, and you also need the power contribution to that. So a lot of those particular products are obviously becoming an absolute necessity. And whether it's at home or whether you're outdoors or you're in a school or every workplace, all these products are absolutely used every single day. So just to show you some of the other range. So from a business point of view, there is a solid product mix. So obviously, it needs to be strong for a work environment, particularly if you're outdoors or you're on a mine site, you're in truck. In an office environment, you've got cords galore and you've got devices galore. Within the work, warehouse environment, you obviously have portable mobile phones, but also used in forklifts or different areas of the warehouse whereby you can -- you got to power up, you've got the scanning technology today. There's a whole host of usage that fixed environment. So these are products designed specifically for the business environment. And I mentioned outdoors. And I mentioned, obviously, from an automotive perspective in the education space, which we have played in previously. So from a workplace perspective, these cases are obviously covering it quite well. From a tablet perspective, from a wireless perspective, there's a whole host of these range, both home and both in the workplace and buying from any retail store that's available as well. And this is, obviously, from a wireless point of view, a product mix that is continuing to evolve and in itself. And one of the questions that came up recently was with all this new evolution of product, what happens when the older product gets stuck with obsolete products and the answer is no. Because our kids all have the older version of phones in most cases. And obviously, not everybody can afford to bring new phones. So the old cases, the old cables, and the old power requirements are all mixed in and never ending almost. So whether you are in a truck, where you're please Force out about, whether you're in health care, which is a massive market in itself, or a doctor surgery or a pharmacy, or you're a delivery driver, the products that Force has available sits all that environment. It's a new adjacency. It's something that we're absolutely going to penetrate. And we will be the most dominant player within that space. So from a product perspective, it absolutely is complementary to what we do today. It's an accessory item. It fits within our strategy. It's a whole host of strategic and operational synergies that are available. We've been mixing those together. And the cross-sell opportunity is absolutely enormous. When it starts with the customer and taking a product or a solution to a customer, that's what our organization is about. We have 8,000 business account customers today that we plan to be selling these products to over the next 60 to 90 days. We'll be arranging this product in every store location that we have available and we'll be doing marketing campaigns to that. Equally, there are some exciting opportunities coming forward in terms of new product range, new exclusive rights that will be announced in the near future. And obviously, from a distribution point of view, new ranging in new customers, and there's about 4 or 5 new customers that are in the pipeline that we'll announce in the coming future. So collectively, the business over the last 2 years in terms of the Stealth and the Force combined has been consistent. Its revenue has been consistent with its profitability. So that's from a continuous point of view. So Stealth is continuing to rightsize. And Force is obviously continuing to look at how to best rightsize [ its root ]. So clearly, there's consistency as a baseline moving into FY '25 and beyond, where we're looking to build on top of that. So from a synergies point of view, we've already outlined, it's about $1.2 million in costs. It's about $2.3 million in margin improvement, and that's just scratching the surface. So none of what I'm just taking you through in a large scale has been factored into our upside. We're all looking at from a baseline point of view. Just taking you back. So 61 store locations will have 90% of the products that we sell today collectively are nondiscretionary items. We haven't seen around about 250 people collectively and 3,300-odd outlets today. We are penetrating the markets of business customers, traders as well as the retail environment. And most importantly, our baseline level, from an EBITDA perspective, has the opportunity to grow. And that's something that we've always promised that we'll deliver on. Just breaking that down a little bit, company -- sorry, company-wide. There's 14 company stores and there's 47 independent locations and there's 6 distribution centers that sits within that infrastructure. And obviously we're able to cater for distribution throughout the whole Australian market. So the benefits are really about market expansion, product expansion, the synergies that come with it and the customer experience. So as I said, there's 8,000-odd customer -- business customers today that we're going to tackle. There's 3,300 retail store outlets from a reseller point of view. Clearly, all those environments require the products that [indiscernible] sell us today. And we're going to be able to offer those, not to put on the shelf for consumers, just reiterating, it's actually for those businesses that require the solutions for their people and for the facilities in which they operate in. So from an outlook point of view, where Force sits today in its primary market is obviously clearly in the retail space, and we'll be moving the business in trade. Clearly, we could add the existing Stealth businesses into that and flip that the other way. So it is complementary to be able to penetrate horizontally and vertically within those market segments. The immediate growth opportunities is about reaching customers everywhere. So for Stealth today, the network volume is important. Its own private label products is really important. That's something that is really less than 2% of their total sales. When we're looking for an extra 15, 16, 17 points and are offering in terms of our margin uplift, we can get that through own label product. And our higher services, which we've highlighted previously, is in the process of getting launched in the very near future. We're just trialing. We're testing our technology platform that sits with that. From a Force point of view, our focus is putting more range in the existing stores, more exclusive distribution rights. The business and trade channels, as I've mentioned, are ranging in the Stealth network. And the synergies are cross-sell, upsell, almost like the McDonald's strategy, digital and automation to get efficiencies as the business grows. Clearly, our cost to serve will come down. From a supply chain point of view, both organizations utilize supply chain from procurement teams, that is from transportation and freight, from then to refill from sales teams, from financing the background, from human resources. So the ability to be able to consolidate and rationalize those is going to be important as well as bringing new range to market. And all that's going to generate, obviously, profit uplift. And our key, I guess, growth in our strategy that's now moving in the high gear, we've said that our target is $200 million by 2025. Clearly, we're at $160 million now. I'm really more focused on ensuring our profitability gets up, whilst it's a pipeline of about $60 million that we've indicated previously. That, for me, is really the focus is getting our profitability increasing as a growth company. From a gross profit perspective and from a revenue perspective, we obviously see that increasing. So by 2028, we've got -- we put out a target back in February of about $300 million, and that's obviously conservative. So one of the things that we started off in FY '18 were at $24 million. We're a $160 million business today in a bit over 5.5 odd years. So it's a great testament to the company that we've acquired 7 of those, but also to the existing people within our business to be able to continue to grow in the environment that a lot of places -- a lot of areas is obviously struggling. From an inflationary, they talk about retail sentiment, they talk about interest rate rises. They talk about a whole host of costs going up. Well, we're not foreign today. However, one of the things that we have demonstrated time and time again is a growing business year-on-year in our profit, in our revenue, and also winning new contracts and making sure that we rightsize our business and not doing business, that's not profitable or incentives. So obviously, we can't get the maximum return on our investment. So I think the key 3 pivots for us is growth in more areas. Our cash flow is growing. Our fixed debt has reduced again so far this year by $1.2 million. Our fixed debt has just under $1 million left, that's available. And we've also indicated previously that we're looking to provide an overall dividend for the company in FY '24. And I'm pleased to see that -- to say that, that's absolutely our target. And more to come, obviously, as our results come out. But that obviously is a really important milestone through our organization, not just the acquisition, but also the -- in order of dividend. So lastly, in terms of wrapping this up, there's a whole host of different products that sort of sit here from Bluetooth to wireless to devices such as wireless mouse, from a rolling Square perspective, there's a whole host of new products that are available that are coming to market. We think we've got really cool water bottles that are available that you can hook your phone on to. But most important from a business point of view, we've got rugged and tough coverage for products that are actually for the workplace. So tablet cases as well as phone cases, as I mentioned, also power. I see a big uplift in the automotive space. That is something that, absolutely, we get requests for every day. So this is about attracting customers to our stores, to our business as a destination, increasing our brand profile, maximizing the profitability. And all that, obviously, we're looking forward to delivering in the near future. So with that, I know there is 4 or 5 questions that have come through. And I just -- Jessica Rich, who's our Head of Corporate Affairs, is going to raise those questions, and then I'll answer those in time. So over to you.

Thanks, Mike. So this one's from anonymous, but I do believe he gets it quite extensively. What elements of Stealth product range do you expect to be able to sell through the Force store footprint?

Yes. Obviously, I think I've covered that.

The second question is also from anonymous. It has been reported in the media that Force master contract Optus. What proportion of Force revenue did this contract staple?

Well, we stood -- Force is still delivering to Optus and continues to do so. There is some product that is -- and ranging that will change. It's about $4.5 million a year. However, the new contracts that we've won is about $7 million a year. So that's well and truly catered, and it's not in the telco space. And as I mentioned, 3 or 4 years ago, Telstra bought back 122 of licensed stores. So licensees change back to current stores went to one single provider. Force was a supplier in that. And they worked their way through that. They supply Telstra to a smaller degree today. However, they worked through that, and the business is robust, and you see exactly the same team in Optus. You actually see our growth area, more in the company's such as who want to offer a complete range rather than a selective range, and that's been the success of our business so far. And if you see all the verticals that we mentioned from consumer electronics, which I failed to mention that on the 21st of May, there was media reports where Macquarie had come out and shift to the JB Hi-Fi business from a hold strategy to a buy and outperformance program for investors, and we're pleased to say that we're obviously a part of that journey. So on the back of that, we see growth in that sector.

And we have 2 questions from Thomas Collins. What is the working capital demand in adding Force? And how do you see it changing over the next few years as the business gets integrated and grows?

So the working capital requirement is $6 million that we've said within our announcements. And it's got a high return on capital employed, I think it's about mid-30s within that business. So we won't need a lot more working capital to be able to grow that business unless something sizable pops out that requires an additional amount. But our existing working capital facilities are able to accommodate a growth of at least 50%. I would have thought based on our modeling in the near future. Now 50% is the current business that we have within Stealth in our existing operations as well as the Force business.

And just a second question from Thomas. What is the estimate of transaction costs and the split between FY '24 and FY '25?

Transaction costs, well, they're not finalized yet. So I can't give you what that number will be. We are finalizing our arrangements with Commonwealth Bank, and there's obviously some legal costs that go with that. It's not significant by any stretch, but there's obviously a cost that's associated with any transaction [ supply ] Okay. That's over. So one more thing that I should mention is within the existing -- so Force comes with a really strong CEO and management group and the 2 vendors will be around in an advisory capacity for the next couple of years. So they're helping on strategic activities. The other key areas, one of my fellow directors, John Groppoli, is the former Chair of Retravision Western Australia, was a dominant business, consumer electronics in the space that I've just mentioned, is obviously a long history -- I think, since about the 1990s with John. And also he owned a business sold to the Myers, David Jones, JB Hi-Fi, Retravision, Good Guys in the world. So he understands that environment really, really well. Our Group Financial Controller, Brendan Rossiter, who is the former CFO of Retravision in Western Australia, clearly understands that environment exceptionally well. And from my own perspective, I built a company, a logistics company that was the largest distributor of consumer electronics across Australia. So Whirlpool, Philips, Neff, Fisher & Paykel, all these products were distributed to the consumer environment or electronics environment. So we have a number of, I guess, core competencies within our existing business of understanding what end users are. So from a Force point of view, we naturally gravitated to understanding how that works. It's not a new area for us. Equally, as I said, it's been 5 years in the making. So we finally have got to a point that we've got there, and I look forward to working with the vendors and also taking this business forward in the future. And with the business doing $160 million in revenue, with the share price sitting today at $0.23, we're clearly cheap, and encourage everybody to go and buy more. Okay. Well, thank you, and there will be further presentation that we released on the ASX with more information that will be available out of the presentation today. So thank you.