FOS Capital Limited (FOS) Earnings Call Transcript & Summary

Good morning all. Thank you for joining me to present our first half '26 results. First, I've already had a few questions submitted, which I've already incorporated into the presentation. I'll go through the presentation, and then I will circle back and answer any Q&A that is lodged as we go online. So once again, thank you for joining me. Now I won't sugar coat this. It's disappointing that we have recorded our first ever loss after 4 consecutive half years. So the company started in June, July of 2019. We listed on the ASX in June of '21. And along that journey, we've recorded a profit every single half year and full year that we've gone along, and this is our first ever loss, and we are disappointed about that. But we are working through and making changes and adjusting as we need to, to get the business back to where it was 12 months ago. We are sort of -- we've been in a sort of soft conditions throughout the really last 12 months. In reality, the second -- the first half '26 is not much different to the second half of the '25 year. Our revenues and EBIT figures were fairly similar. So we've tracked similarly throughout the whole last 12 months, but we are working through how do we rebound from that position. The quote book is still strong, and we're still quoting similar numbers that we have been for the last couple of years. It just seems to be taking a bit longer to land some of these jobs, and that has meant that the sales have been just a bit off the mark, and that led to the sort of lower EBIT figure than we had in the previous half year. The ATS acquisition that we completed at the end of June of last year is basically on track from where we thought it would be from when we did that deal. When we announced that transaction, we said it was a 12-month rebuild. We bought it out of administration. We had to put a team back together. We had to get all the approvals through the road authorities. We had to get stock back in because the stock had been depleted. So we worked through all of those issues through that first 6 months of last year. I'm pleased to say that we've completed all of that work. We've got 8 people that now work in the business. Stock has arrived, all the approvals have been transferred. We're actually working on a couple of new products that we're in the process of submitting to the authorities to get approved. We've been quoting furiously over the last few months. Our quote book is up to about $6 million for the ATS business from a standing start and the orders have been slowly coming in, and we expect the second half of the year to be much better than the first half, and we're aiming to get that business to profitability by the time we get to June of this year. So that's on track, and that is -- we've separated that trading loss so we can show you what's been happening with that business. But in reality, that's where it was always going to be. So that's not a surprise. And right now, we believe we're on track to get that profitability. And by year 2, we expect to do some decent numbers out of the ATS business. The Glowing Structures acquisition was completed in May of last year. And again, from an operating point of view, it was actually profitable for the 6 months. So no negativity there. We've generated about $2 million of specification work that has not yet come out to tender. So the idea of Glowing is they -- the jobs they work on and design generate about $14 million worth of specifications each year. And the strategy about us acquiring Glowing is for us to capture a decent part of that $14 million. So far, we've just generated that $2 million that has made the spec mark. And those jobs will come out for tender, and we expect that we will convert those jobs into orders over the next 12 months. But along the way, that $2 million should get up to $4 million or $5 million or $6 million. So that acquisition, again, is on track and has not really played a role in the lower number that we've reported in the half year. Now as a result of the softer trading, we've gone back and relooked at what cost we can pull out of the business. It's sort of a good time to do that because a year earlier, we were flat chat busy, and we needed every man on deck to get the work that we had out the door. But with the softer period, we've looked at ways of pulling cost out. We've identified one potentially $1.5 million that can come out. We've already started implementing that. It's a combination of headcount reduction, and there's a particular product line that we manufacture in our Brisbane facility that we've decided to import, replace that product. With that product is now much more competitive, we can go after larger jobs that we weren't able to go after with our manufactured line. We've already won and supplied our first project with this particular product line. So, a combination of that and some headcount reduction is going to lead to pulling out about this like $1 million to $1.5 million of cost. We have already implemented those parts of that area, which is about $500,000 to $600,000 that has already sort of begun, right? Over the next few months, we'll be able to complete the balance of that. And that gives us a bit of a cost reset. So we're hoping that, that cost reset means that with these sort of slightly lower sales, we can be more profitable. And when our sales pick back up, which they will, we -- our EBIT margin should be then above the 10% that we've been aiming to get to from commencement. I want to reiterate that our strategic plan of how we've built this business, the acquisitions, the consolidation, the ATS business is still on track and the strategy will not change. We believe in that, and we expect that we will bounce back from these lower numbers and deliver the results that we know we can do and we did even in the last 12 months. I'll run through just some of the numbers. So $12.4 million in sales for the half year was 12% lower than the previous corresponding period. EBITDA of $0.5 million was down by 65% of the previous corresponding period, but was in line really with the previous half year, which is the June half year. And so was the $12.4 million actually was a little bit higher than our June half year result. Net profit after tax, and this is including the ATS sort of restructuring costs, was a loss of $600,000. And our operating cash flow was positive $400,000, down from $2.5 million in the previous corresponding period. And as I've mentioned, the Aldridge and Glowing acquisitions are, as far as we're concerned, on track and we're happy with the way that they've been -- they are traveling. In the presentation that I released, it lists out the relative half year revenues and EBITDA and margins. And if you look through that, you will see that the last 2 halves, as I've said, are very, very much in line. So our job is to sort of try and tweak that to get this order book back up a bit higher, which will result in the higher sales, which will get us back to where we were in that '25 financial year. Our strategy. We'll continue, as I said, how we've already executed. Every acquisition we've done has been integrated into the business we -- there's no issue with -- nothing is blown up in our face with that process. And we want to continue that, and we'll continue to identify businesses that we think can add value to this business. And we'll continue to seek synergies from those acquisitions in order to improve profitability as we move forward. We'll trim the team down a little bit as part of that cost reduction program. But essentially, the core business will carry on, and it's not going to take us much just to bring those sales back up a little bit. There are a couple of larger orders that we've been sweating on for quite a few months. And with some luck in the next few months, they may come through and everything is good again. I will might switch to some questions, which I have.

A question from Derek, is your previous revenue projection for ATS $20 million annualized still intact for year 2? So in theory, somewhere between $10 million and $20 million, we would expect for year 2. And just so you know where that number comes from. When we bought ATS going back 2 years before they went into administration, so that would have been '23, I think, they were doing somewhere close to $20 million in the ATS business. So -- and then they dropped the ball over those last couple of years because they couldn't fund their stock to purchase and they couldn't supply projects. So our view was Year 1, we rebuild the business. Year 2, we start to get those numbers and replicate what they were doing in that 2023 year. So that's where the $20 million comes from. And we would hope that we'd be doing somewhere in that vicinity at least, by year 2. So we're a long way from that now. But the jobs that we're quoting and the numbers are building, so we have some level of confidence that in the next few months, that order book will become sales. And then once that's running, we should be in good shape. And in reality, we don't need to do $20 million to make that business profitable. Just so around about $3 million to $4 million is that -- puts that business into the black. So anything above that will really drive it home. So we'll be aiming for $20 million, but hopefully, anything above in that $10 million to $20 million range, we'll be sort of satisfied with. I don't have any other questions at this point of time. And I think I've addressed the questions that I received through the e-mail yesterday. I would like to thank you all for joining me. Feel free to reach out directly if you want to chat.

Sorry, apparently, Bernard raised his hand. You might like to address him.

I don't have that.

Bernard, could you share question with Constantine?

It's Bernard. You might recall speaking with me some months ago around the time of the ATS acquisition or post the acquisition decision, I think. And I head back to the time when I believe that you were involved with the ATS or were you not CEO at an earlier time of that?

Yes, I founded Traffic Technologies in 2004. I actually did the ATS acquisition when I was at TTI at that time, that was in 2006, and I left in 2007.

The reason I ask that is that at the time, we were shareholders, my family was shareholder. And it was a business that struggled ongoing. And when FOS took over that part of that business, I was concerned that, one, that the -- just how aligned it was with your other product range and the way you had grown into what were clearly synergist businesses, clearly from -- in the sense of the dialogue, which you explained in justifying those business decisions seem to be quite valid and subsequently, you've done well and are doing well with those. I guess my current concern is, one, that business or that business going way back always struggled in my recollection. After we got out of the business, I didn't follow it anymore, I got out of shareholding in that business. And I'm wondering to what extent there has been or the diversion, what appears to be a diversion of resources to get that business back on track may have impacted the sales elsewhere in the business and deprived of the resources that those other parts of our business would have...

I can address all of that for you. Firstly, the ATS business for the best part of maybe 10 years from when TTI acquired it was in its own right -- its own division in its own right, was the only profitable business that was in the group. Now at a certain time, they stopped publishing individual unit results. So you couldn't see them. But in the early days, they were publishing those numbers. And the ATS business was a profitable business when we bought it back then, and it was profitable for at least probably 8 or 10 years since -- whilst they had it. The ATS business today is because it was shut and it was -- struggled for the last 2 years because they couldn't get stock, we had to rebuild it. So we're treating it just about like a start-up in that sense. And the people that were put in that business are separate people from our core group that are specialized in the road and traffic sector. Now, it has -- first of all, it has not impacted at all our resources in relation to the normal FOS, the general FOS business. We raised the capital to buy this business and we actually sold off some of the noncore assets that we didn't want. We raised about $700,000 of those sales. And if you like, to put it one way, the $800,000 in operating cost to run that business for the half year has been offset by the $700,000 of income we got from the sale of assets. So that business from a people perspective and from a cash perspective has not impacted FOS at all. And if you look at FOS and like I mentioned earlier, our second half of full year '25 from a revenue and EBIT point of view is actually very similar to the first half '26 numbers. So -- and that was before we -- the first half -- second half '25 was before we bought Albridge. So I don't believe it's had any impact whatsoever on our people or our resources because it's a separate set of people that are looking after the Albridge business. And apart from sharing some back office admin and warehousing, there's no other impact. So I'm very comfortable with the fact that there's been no distraction. And in one sense, it's a bit hard to draw parallels from what happened with ATS years ago under TT. It's a clean business under us. I believe wholeheartedly in the road construction sector. For us, it's an extension of our business that we were concentrating purely on commercial work. And we needed to grow our business, and we need to expand into other areas. And we believe the road sector is a great place to be. There's actually less competition because of the high level of barrier of entry because of the product approvals into the road area. So, we sit here comfortably that we've made the right decision to acquire ATS and ATS is on track to deliver the results that we want to deliver over the next 1 to 2 years. So that's the best way I can explain it. Now effectively, time will eventually prove me right or wrong. But right now, I think we're on track to deliver that result when the time comes.

So the -- in terms of getting back, I suppose, to the -- what appears to be a different type of business, if you like, [indiscernible] Lighting, but with the reduced competition, whilst TT -- well, at least never seem to be able to perform in the way that shareholders hope, is with less competition, you would normally expect higher margins. And with mainly government business, I guess, semi government business and so on, there would be longer time lines often. But are you seeing in your quoting, admittedly, you're trying to, I guess, get back in with the ATS business. But are you seeing higher margins? And if you're not at the moment, do you expect to see ongoing relative to the other part of the business, which I had seen as being your forte and building the professional side of the lighting as being a particular strength of the business, which has now been arguably diluted or diffused. I know you've explained some elements of how that may not be the case. But from a shareholder perspective, I don't think it's hard to -- and all that -- incorrect, if you like, to ask those questions.

No, I'm happy -- Yes. I can see where you're coming from. And it's fair enough to ask the questions. We thought long and hard when this opportunity came up about whether we wanted to pursue it or not. And we were looking at ways like we always are about how do we grow the business to the next stage. And like I've said, the road sector is a good sector to be in. And I know that from my direct experience of being in that industry back 15, 20 years ago. So the reality is we saw it as an opportunity to grow the business. And we -- like I said, we don't believe it's a distraction. We believe the margins will be in that plus 40% GP range. Our current business also trades in that sort of 40% range. So in that context, we're not going backwards with Albridge. And I think whether we get better margins, we need to wait for that to flush itself out over a longer period of time. Right now, we're just trying to secure some work and get back in the game a little bit on the ATS side, where -- so margins aren't our sort of top priority at this point of time. But we expect when the dust settles that we will be doing that plus 40% margin in that business. It's a product that we don't have to manufacture in our factories. It's a fully imported product. It's more of a box in, box out arrangement. So we've only got the 7 or 8 people that we've got working in the business are predominantly all in sales. So we're not having to put a team of people to make this product at the same time. I mentioned that we have developed or in the close of developing and submitting for approval 2 new products. One of those products is to make the one of our product -- existing product lines more competitive. So we believe that will not only bring more sales, but actually improve margins. And that product is in the sort of final testing stages before it can be submitted. So there's a lot of work going on in the background to get that business ready. And I still believe that it definitely has no detrimental effect on FOS, the core FOS business. And I still believe that we're on the right track and we've made the right decision. So -- and we live and breathe this thing every day, and we're working towards getting it right. And just it's sort of unfortunate in one sense that we've had the softer trading on the core FOS business at the same time that we had our first half year with Aldridge. So that is unfortunate because we've got a loss on one and a softer result on the other. So I can see why yourself and people might look at it and sort of point the finger at -- all is ATS part of this problem. But from where we sit, it's not. We need to get FOS back up where we needed to get to. Simultaneously, we'll work through the ATS and get it into a profitable stage in the time line that we originally outlined, which was at the first 12 months.

Con, we have one more question on the Q&A.

Yes, saw that. I got a question about dividend. So we look at our -- we're a young company. And in one sense, we get question about why we've even paid a dividend. We've paid a dividend 3 years out of the last 4 since we've been a listed company. Each year, we look at where we are in the context of paying a dividend. And we do that at the end of the sort of financial year, and we review our position then. So we haven't had any discussion at a Board level about what we should or shouldn't be doing about a dividend, and we won't address that until we see how we end up in the full year. All right. I've covered all the questions. Once again, thank you all for joining me. I'm open if anyone wants to reach out directly. Otherwise, have a great day.