Aldridge Traffic Systems Pty Ltd. (FOS) Earnings Call Transcript & Summary

Thank you for joining me. As usual, we're recording this webinar, and it will be available on our website later today. [Operator Instructions] So we're really pleased to announce the acquisition of Aldridge Traffic Systems. Aldridge Traffic -- ATS is a division of Traffic Technologies. And TTI is an ASX-listed company that went into administration about 5 weeks ago. And for some of you who may not know, I was the original founder of TTI back in 2004 and left it in 2007. So I've been following it relatively closely given it's a listed company throughout the last 18 years that I've been away from it. And for various reasons, they have got themselves into a lot of trouble over a number of years. Eventually, the whole company went into administration. We showed an expression of interest along with a bunch of others. And to cut a long story short, we were the successful bidder. We signed a heads of agreement a couple of weeks ago, and we entered into a binding agreement yesterday, and we expect the transaction to close sometime next week. So ATS is predominantly a street light business. Now streetlights in Australia are governed by all of the various road authorities or councils. And this industry has a very high barrier to entry because of the approvals and the tight approvals required to get your product on to the roads. So in that context, there's only really 3 or 4 players in this industry. Sylvania is by far the largest player. They used to be part of the Gerard Lighting Group. And TT through ATS was effectively the second biggest player. It's probably $100 million plus market in just street lights alone. And over the last few years, the road authorities have gone about changing all of the old technology street lights, which were either HBS or metal halide lamps, changing them to LED. So there are hundreds and hundreds of thousands of street lights around Australia that all need to be changed. And this is an ongoing changeover program that the road authorities have been undertaking for the last few years and will continue many more years ahead before they can reach saturation point. And by the time that happens, the original light fittings are ready to be changed all over again. So it just keeps cycling over and over and over. There are predominantly 2 types of street lights. There's V category, which is your largest street light that goes on to sort of a large road or a main road. There's P category that goes on to smaller roads and pathways. So these are the 2 typical fittings. And there's -- within each product, there's a bunch of variations, different wattages, different technology that goes inside them. So because of the high barrier to entry, it's been -- it's hard for any player to just walk in and get into this industry. And hence, we -- even though we like the industry and have liked it for a long time, we chose not to enter it because of the long lead time that it takes to get in and the cost to get in. So really, we've been waiting for our opportunity, and it's come by this acquisition of ATS. Now ATS apart from the street lights also has a smart system that -- where all these lights -- all these products connect to and are monitored by the road authority. So there's a software package that goes with the lighting as well. And on the software package, every device, not only streetlights, but other devices on the road get connected to the package, and there's like a recurring revenue stream that is generated from the ATS and smart systems. So product sales and an IT platform. So for FOS, it's fantastic to have this opportunity to break into this road industry with this product and streetlights. And we see it as a really fast-growing market for us and a new direction that we can take that's in an industry that's predominantly government funded from the road authorities and councils. And it's -- over the years, it's a steady stream. And our job is to take market share -- or sorry, regain the market share that ATS has lost, especially over the last couple of years, and I'll run through some numbers in a second on that. So we need to sort of spend the next 6 or 12 months rebuilding the business and the damage that has been done to this business over the last couple of years. And then beyond that, by year 2 and beyond is to really try and take some market share from the incumbent player as in Sylvania. Now -- the main problem, and I'll just talk about ATS, which is a division of TTI that had serious funding problems over the years to the point where they were winning contracts and large contracts, $2 million, $3 million, $5 million contracts over 2- or 3-year periods, but could not supply those contracts because they couldn't buy the product. The product is especially custom made and fully imported. And in effect, they burned their suppliers to the point where they couldn't get product. So they couldn't supply these contracts that they had won. So to put some numerics around that, in full year '23, which was effectively their peak in sales in this business, they did about $19 million of sales in street light and associated products. The following year, full year '24, that figure dropped to $6 million. So it went from $19 million to $6 million, and it was heading somewhere around the same figure this financial year, for full year '25. It was still hovering around the $5 million or $6 million mark. So all of those -- that sales decline is because they just really couldn't supply.It wasn't they didn't have the order. They actually had the order, they just couldn't supply because they couldn't get the product. So our job, especially over the next few months is to get the supply chain sorted out and get some product back in stock. We're already in discussions with the manufacturers of the products and are ready to push the button once we settle next week so that we can start getting the stock levels back up to where they need to be. Simultaneously, we're going to try and resurrect as many of the contracts and orders that were in place prior to going into administration, and resurrect as many of those. So we've got some sort of starting point. And I think what we'll do at around about the same time that we announce our full year results for FOS, which will be usually around the third week of August. Somewhere there, we'll probably give an update on what the first month and a bit has been like in ATS and what we've been able to achieve in that. And by then, we'll know how many of those contracts we've been able to resurrect and use a starting point. So our job is to sort of get the stock levels back to where they need to be, secure as many existing orders as possible, start tendering new work and really over the course of the next 6 or 12 months, consolidate the $6 million of sales that they've currently been doing at step 1. And then by year 2, we're trying to recoup or recover the sales figure back up to somewhere between $15 million and $20 million is where we'll try and aim at getting. And then that sort of brings the business back to its high point of 2023. And then from there on, we'll try and take as much market share as we possibly can from the incumbents. Now essentially, this business as a group has been losing money over a long period of time. But in the context of how we bought the business, this is not a restructure because in effect, we have no costs on day 1 because all of the staff have been let go when the administrators were appointed. And we have now spoken to the key staff that we want to bring into the business, and they will start as a clean scheme with us because they're being paid out by the administration process. They'll start as a clean scheme with us. So we're only taking on probably 6 or 7 people to start off with with no broader across liabilities. We do not require any of their properties because we'll be relocating the streetlight business, which is based in Sydney. We'll be relocating it into our KLIK manufacturing operation at Eastern Creek. So we'll have the business in there. And there were no other liabilities that we've taken across as part of this transaction. So in effect, it's not a restructure because we don't need to go and pull a whole bunch of costs out. I'm calling it a rebuild. So it's really adding in some costs in order to get the business up and running, which is essentially those 6 or 7 people. And then from there, we will add staff as required depending on how we're traveling over the next 12 or 24 months. Now because all of the other normal costs of operating a business, which be overheads and out gains and rent and admin and all of those IT costs and all those type of things that TT was incurring, we effectively don't have to duplicate any of that. We've already got that set up within FOS. So that will just be absorbed by the existing operations that we have. So if you look at this division, which will run as part of FOS outside of the cost of sale and the 6 or 7 employees, there's very little other overhead costs. So we're expecting a much higher EBIT margin in this business than what that TTI were doing prior and higher margin that even FOS does in its existing business. So we're running at about 41%, 42% GP. We expect to get a high GP out of ATS, especially once we've got the revenues back to sort of plus $6 million to $10 million, that margin should drop through. So we expect the overall GP of FOS to increase over the next couple of years because of the contribution from the ATS business. Now when we acquired the business from the administrators and the process of going through that, the way we ended up sealing the transaction was we bid for all of the businesses that were inside TT, not just the ATS business that we wanted. But effectively, all the other businesses noncore for us going forward. And what I've been doing in the last month, whilst we've been negotiating the acquisition of ATS, I've also been having discussions with other industry players about who wants to take over the businesses that we will not run going forward. And just to give you an idea, there's a big traffic signage business. They make road and street signs called DeNeefe and Sunny signs. So in effect, that's up for sale. There's a business called L&M Traffic. There's a contracting business that installs traffic signals in Victoria, that's up for sale. And there's a business called QTC, which is a traffic controller business, and that's up for sale. Now at this point, we've put it in the presentation that we've estimated between [ $500,000 ] and $1 million for some of those assets. And those transactions should happen fairly quickly from the time that we complete our transaction. So I expect in the next month or so, we have reached agreement to sell or even sold those businesses. And that money coming back in will help fund the working capital to grow the ATS business. And the major ATS working capital will be replenishing the stock levels that have been diminished because of the lack of their ability to buy stock. So there's a funding part to this. We've raised $3.7 million by Shaw and Partners for sort of sophisticated investor placement. We've raised that at $0.30 a share, and it was effectively oversubscribed. And there will be some sort of scale back happening at the moment, I suspect. So Shaw and Partners have supported us through that fundraising. And the $3.7 million raise, there's $3.1 million, which is the purchase price for the business. So the difference between the $3.7 million, the $3.1 million is some additional costs -- sorry, additional working capital and cover the cost of the transaction and the placement. But then we're getting the $0.5 million to $1 million back through selling off of the assets. So that will give us enough surplus to run the ATS business without us requiring any extra funding either through debt or any further capital raising. So we think we are well funded. We are really excited about the opportunity that ATS is going to bring, and we think it's a really positive move for FOS and the outlook of FOS going forward. And we're just going to get through the completion process and then get hard at work at starting the rebuild process. We'll also be able to use -- utilize a lot of the FOS existing team members, especially in sales and production to utilize them in the ATS business. So there will be some cross sharing. So it's not going to be run completely as a silo. It's sort of incorporated into FOS and we'll spread our resources, which will keep effectively the overhead cost down even further. So yes, really excited. We think it's positive. It's setting us on our path of where we want to go. We've had 6 acquisitions to date that have all gone really well and smoothly, and we expect this one, albeit because it's through administration, it's in different circumstances. We expect to be on top of this one as well, and we expect this is going to add value to FOS -- to the FOS Group. Now a month ago, we also acquired a company called Glowing Structures. Now I just want to touch on that one a little bit because it's also a very important and strategic acquisition. Glowing is a business that gets engaged to design lighting for lighting projects. So they're getting paid to fee-for-service, they charge a fee for doing the designs. And their revenue was about $1.3 million, and they generate about [ $300,000 ] EBIT margin in the last couple of years. Now we haven't bought them because of their revenue and their EBIT, although that's nice to have. Our main motivation for buying this business and integrating into FOS is that of the jobs that they're designing day in and day out, they generate about $14 million to $15 million worth of lighting specifications for the lighting products to go on to those jobs. And that revenue does not go through the Glowing structures P&L, but they're only engaged to design the project. So by us acquiring them, we're now sitting alongside the design team at Glowing. And our job along with Glowing is to get as much of that $14 million to $15 million specified as FOS product, not other lighting product, which is currently what has been going on. So we're not sure exactly how much of that $14 million, $15 million we can capture. Initially, we'd like to get somewhere around $5 million or $6 million or $7 million of that. And if we can do better than that, that's a real bonus. So that's an extra $5 million, $7 million of sales that we otherwise wouldn't be generating or if we would generate the whole cost of generating it by having to employ more salespeople and the like. So we think the Glowing deal is an equally good deal as the ATS is. And we think with a low-cost entry into that low risk, the business pays for itself because of the revenue it generates and this ability to generate these extra sales is going to boost our bottom line. And I think with Glowing and the TTI ATS acquisition, we can -- there's a pathway to sort of $50 million of revenues if you follow where I'm coming from. Over the next couple of years through those deals plus the existing business that we've created and the growth we're getting through that, we can now see a clear path to sort of $50 million without doing any further acquisitions, even though there are some still in the pipeline. So really excited. We'll get to work.

And there are some questions that I'll work through and -- so one question is, is the ATS business breakeven at the current $5 million to $6 million revenue? Yes, it is breakeven in our hands. It was not breakeven in TT's hands because of whatever other costs that they had in the business. So at $5 million or $6 million, it was losing money for them. $5 million or $6 million for us is definitely a profitable business. Even lower figures than that, I think we can break even at $3 million or $4 million even. So -- but at $5 million or $6 million, we will make a modest profit, maybe $0.5 million of EBIT around those numbers based on the information we have. And that's why it's important for us in the first 6 and 12 months to steady the ship, make sure we're still doing those numbers as we build it, getting ready to launch into year 2 where we can increase those numbers by two and threefold. Now that's the only question I've got online. If anyone wants to ask a question, they can hit the Q&A or raise the hand button. And if not, I don't have anything to add other than we're really excited and looking forward, and we thank everyone who's supported FOS to date. And if any of you want to reach out directly and have a chat, just don't hesitate to give me a call.