Intelligent Monitoring Group Limited (IMB) Earnings Call Transcript & Summary

All right. Welcome, everybody, to the IMG quarterly cash sort of Q&A session. We thought today what we'll do is we'll just -- I'll make a couple of comments just on the quarter, and Jason is going to run through just a sort of, I guess, a summary of the cash flows and a couple of notable points, and then we can throw to Q&A. So we'll rattle through it fairly quickly and happy to have questions. [Operator Instructions] Thanks, Janine. So just kicking off, we're very happy with is quarterly result. Effectively, it follows what we said we were looking to do after the back of that first quarter. It was really a settling quarter for us. So the first quarter -- right at the start of that first quarter of FY '25, we put in place a number of changes, in particular, was Project Funnel Web, which was the merging of Adeva effectively and the ADT back call center into one business and effectively relaunching in as Signature Security. And so that quarter was as messy, as we've disclosed. But this quarter was really about settling the business and settling Project Funnel Web and settling into a group. It was also settling in the ACG and AAG acquisitions. And then at the back end of this quarter, the introduction of DVL into the group. Really, the focus has been on getting the systems and the structures in place, improving the business and particularly around the customer experience. And so I would call out the implementation or part implementation we were still working in New Zealand of Salesforce.com, which will help us with the way we go about interacting with our customers. Looking forward, the second half really now becomes about growth. And so again, I'll let Jason go through the numbers, but we are focused on growth. We're happy with the commercial pipeline, which is a key driver for the business at this time, continues to build. So on track, and we'll talk more about that at the half year result. And of course, the provisional launch of the guarding services, which we announced late last year, but the full launch and ramp-up of those services as we go through this half with some really, really positive indications of the success of the service, but also, I think, the commercializable success that we're expecting to have. So Jason, I'll hand over to you to go through the results. Thanks.

Thanks, Dennison. As you saw in the 4C, we had reasonably -- we had positive operating cash flow for the half. If we look through some of the nonrecurring items with very strong cash flow for the half of $6.5 million, some of those one-offs come from taxes paid by ACG and NZ as they settle into the consolidated tax group for prior year. We had some working capital impacts from inventory investment and from the acquisitions themselves, which we cover on the next slide. So all of the nonrecurring costs in the half, we made our final payments to [ JCI ] under the TSA. We -- as I said, we paid some tax through ACG and NZ whilst we work through there joining the consolidated tax group, but it was based on the FY '24 year business acquisition refinancing costs. Obviously, we made some acquisitions, settled on the start of the half, and we acquired DVL through the half, which has been a very positive addition to the business, as well as the cost for the refinancing -- debt refinancing package, which is well on track. Then Project Funnel Web, where we talked about at the end of Q1, which was the alignment of ADT and Signature businesses to gain any synergies from the operating systems. And obviously, we had impact from acquisitions, which is the working capital drag that we experienced from the positive EBITDA contribution, but the negative working capital used from their operating cash flow. Both came in with positive EBITDA, which has been great. ACG and DVL have traded on their working capital. AAG came in with high AP and AR balances from prior year, but no cash. the AP and AR balances settled through the first couple of months, but with no real cash benefit for the group. That breaks out the nonrecurring costs at 6.6, which is what we've added back into the operating cash flow. So you see a lot of reshaping the business for the first half, getting ready for growth in the back half. Just wanted to talk quickly on CapEx, [ Janine ] . So CapEx is in line with our expectations, given the 4G project in New Zealand and medical systems in general. That's it.

Great. So I'll just go back. Janine, if you don't mind, just going back to the second slide with the full run-through. I'm just cognizant that people actually haven't had very long to look through this. So just couple of highlights here. So firstly, if you -- if you strip out the one-offs that Jason has mentioned for the half, cash flow of $7.9 million, but what probably more importantly, the step-up in the second quarter, which is what was, I guess, the feature of the first quarter, was the poor cash and the normalizations seeing that come through now in the second quarter, and we expect to continue on now. And the extent of nonrecurrings and one-offs now are very much diminished into the scale of our business. I'd make the point we've announced that we're maintaining our adjusted EBITDA guidance of a great -- of above $38 million. which is good. The big features, though, for the revenue quarter-on-quarter up pre-acquisition effect of DVL at [ 70% ] if you include DVL, so that underlying EBITDA for the quarter of 9.24 pre-acquisitions, that puts us on track. So you can see the stepping up that we're seeing to get us to our guidance. And of course, as you take that through into Q3 and Q4, what it's implying is a very good pickup in EBITDA going into the FY '26 year. So essentially an acceleration of the business, if you put it that way. With the impact of acquisitions, we're close to run rating $40 million of this quarter. Now I would hasten to add the DVL that really impressive first month is not a repeatable month-on-month number. We're still anticipating about a $2 million EBITDA positive impact from DVL, which was around the numbers we had anticipated when we acquired the business. I'd say it is trading to the upside of that, but it's not going to run rate at the 500,000 number for the first month's contribution that it made. And then there's nonrecurring expenses. And probably just to flesh out a little what Jason said about the acquisitions. So the effect Jason mentioned, the negative effect on working capital, of course, that's offset by the cash that was left in the businesses when we bought them. So when you buy a business, you get the cash to reflect that effect that you are buying a business with considerable payables at that moment. And what happens is you don't get that cash and your cash flow line to offset the negative in the short term, it goes into your investing cash flow line. So what you'll note is in the cash flow from investing line, actual acquisition costs are less than the stated numbers. That's the cash offset effectively for the working capital drag that we inherited. And so what it means is it does depress your appearance of operating cash in the first period of acquisitions if you're buying businesses with payables outstanding from prior years. So I guess the point being that normalizes. And so they did. The key focus for us is EBITDA because that is the earnings power of those businesses, which is what continues into the future, and we're very, very happy with that. So that's the single biggest nonrecurring item on this. We'll let it persist only if we make acquisitions. So that's that is fine. And then otherwise, I think the [ $65 million ] normalized number is a sort of healthy base for us to work off. We look for to continue to move that. General working capital is broadly in line if you strip out the inventory build effects, which Jason noted on the slide on the nonrecurrings. We have invested through this half in [ Syber Sense ] stock and the video guarding technology that we're looking to rapidly deploy and have started to rapidly deploy, including a significant investment in stock in [ Intelius ] product, which is a essence [ respectively essence ] product in anticipation of the full 3G conversion project in New Zealand. So I think that's a pretty good parking point there and rattling through it all today. So I'll probably throw to questions. But I'll just reiterate, like we -- this is where we want it to be. It's probably a little bit ahead of where we want it to be actually or where we thought we'd be. And we feel in a really good spot. Probably the last thing which will be a question is the debt refinance is fully on track. We've made -- we've sort of tried to keep the market abreast as we've gone through it. We noted last in December that were down to 1. We picked our party effectively. We had a very, very exciting [ romance ] with a number of the senior banks in Australia. It was really heartening to see the turn up to that. We've now selected one of the big 4 banks. We are very close to documentation. It has been credit approved, and we would be expecting to announce that package and also to be -- to announce the redeeming of the current debt facility probably in days, if not a week or 2. And so that's an announcement and something we're really looking forward to talking about but fully on track. So I'll pause there. Janine, if you'd like to assemble any questions if people have them. I appreciate this is the first time we've run this forum. So we'll do our best to take them as they come.

I've got two questions, Dennison, in the Q&A. So I'll read out the first one. Can you please provide more detail on how you intend to use the January crime captures as to inform, a, potential customers and b, the public in general?

Sorry, can you just restate it? I missed that.

Can you please provide more detail on how you intend to use the January crime captures is to inform potential customers and public...

Yes, yes. No, no, excellent question. Look, so turning to the future, and obviously, we would like to talk a lot more about this at the half year as we'll sort of look for a bit more forward into the future to quarterly cash; we've had -- I mean inside the business, I'd hasten to say it's starting to feel pretty electric. I'm in the New Zealand office today, and all the conversations around the guarding technology, which we have introduced, and this has been a journey for IMG in particular, even pre-ADT for a couple of years now with first investment in Patriot and then finding the full solution range to be able to offer a fully surveilled video guarding product, which can provide police response. The results have astounded me, to be honest. I thought we might -- we were really looking forward to the first time we actually had a capture. So [ Burberry ], where we actually saw the people and actually got a police response and court summon. We've actually had 5 already this year. So from the start of January, it's just lit up. and that would be over 10 criminals effectively that we've caught in the act that have been met with police response and subsequently being charged. And so I'd hasten to say it's probably the first time in this monitoring industry that, that's actually probably ever happened. If it has happened before of a signal alarm, it's been happenstance and luck probably rather than actually the service itself. So unbelievably significant change in the way the industry works and what we're intending to do. And the value proposition is outstanding for customers because you're effectively cutting out the guarding, patrol piece that we have to do right now for a signal alarm to verify an event before the police will respond. So that's labor, that's time. And it's far more of dollar value to the customer than actually the monitoring piece of itself. So really exciting. And how do we intend to use it? Look, we are all focused. And it really speaks to that first quarter a little bit, too, and also what we're doing in the back room here. We are very focused on getting -- trying to get our house in order and get our capacity set and our processes set so that we can mass accelerate what we think will be significant demand for this service. So at the moment, we are not intending to -- you won't see us on Channel 9 talking about changing crime stats for a while, frankly, because I think we'll be flooded, and I don't think we can handle the demand that it would generate. And what we are doing is we have won a couple of fairly significant customers, probably not significant enough at the overall group level yet to smooth the numbers in a way you'd really note, but they are significant deals, so $1 million deal one, for instance, and we're really looking at [ bidding ] it down. So it's all about quality processes, making sure we can do it. We sent a team to the States in December to go up and really learn hard off what we think is best practice and bring it back to Australasia to all of our rooms to make sure that we really, really, really rigid and understanding of what we need to do to make sure this works every time and at scale. In the first instance, we're expecting to launch this to our current customer base at the end of this month, and we're going to do it in a batch fashion, again, because we think that the demand will be fairly substantial. And to put this in place is labor. So we do have to send technicians out, there is a job to be done. In some cases, it's a complete piece of work. In some cases, it's using our technology and working with what they have. And so we need to understand more, as we go into this next period, about what it's going to take to be able to grow rapidly. And of course, technicians are a key part of that, which is why we've been trying to bulk up our technical base. So I think we'll grow into advertising this and marketing it as we go and as we need. But as I say, we will step through it cautiously. In the first instance, the actual first goal has been internal communication and getting the team, we're nearly 600 people across the business now, really understanding what we're doing. I have to say, for an industry with a lot of people in this business that have been in the industry for a long time, it is a substantial change in attitude and excitement. I probably say it's the first time people have been genuinely excited about what we're doing and can do for society in living memory of this industry. So it's going to be a very good time, I think, to be at IMG and to be in this industry. Sorry, it's been a long answer. But next one, please?

So the next one is it's with a comment, Dennison. Investors are probably interested in NPAT, EPS and DPS. So with that, can you give an estimate when will we be able to present statutory figures, which also contains a relevant sales [ season ]? Could it be FY '26?

Sorry, that contained the relevant -- what was the last word?

Statutory figures?

We'll produce statutory accounts for the half year result in the full year result. I mean this is just a quarterly 4C free cash flow just per the requirement we have. We've got 3 more quarters where we have to present, just based on the way the reporting works having been in a company that didn't used to make cash. In terms of profit itself, if that's sort of more to the part of the question, we have a big depreciation and amortization line related to the historic customer base that we've acquired. Effectively, we have to write it off over 5 years regardless of the fact that, a, the intangible value of our brand will persist for a long time; and b, the customers themselves will on average stick around for much longer than 5 years. And so that is a weight to which we run against. And we'll run against for some time. Obviously, one day it will abate and probably disappear a bit. But we don't have a forecast exactly when that will see us at a statutory NPAT level be profitable. We haven't done that work. At an NPAT level, though, if you remove the impact of that, I would argue, incorrect statement of the way the value in this business flows, we should expect to be quite profitable this year. I think point I would make is we had a fair fee in New Zealand and that we had to pay tax because we are profitable. And we had, as Jason said, it related to the '24 year and we inherited the business and had to get it audited and a whole lot of stuff. So we're now in the process of working on our tax working group. But we are a fundamentally a profitable business. It's just that accounting standard. And so half-year result, you'll get statutory accounts, obviously. We had audited accounts last year, and we'll have fully audited accounts for the June year as per normal for a listed company. Thanks, Janine.

Third question? Q2 run rate EBITDA already above $38 million guidance pre-DVL, is that seasonal? Or can we expect that to continue before further organic growth?

Look, we would hope to build on our underlying EBITDA from here to do that in our -- I guess, in our budget and model, is around growth now. And so yes, we think -- I think that's a pretty good level. There's not a lot of -- there's no real seasonality per se in our EBITDA. I mean, you do get a little bit of variation, say, December, January, Christmas holidays, shorter working period. So some of the service work and what have you can be just days worked a little bit less. But otherwise, it's actually a pretty stable business. I think 65-ish-percent of our revenue is basically locked in through monitoring anyway. So it's a recurring monthly -- month. It's like being a fund manager type of thing, and then the rest of it is service and store work, which we are looking to grow. So we think that's a pretty good base to move forward. And I guess, as I said, to hit that -- also to hit that actual guidance level of greater than 38, not just the run rate level, it implies that we'll be run rating higher than 38 and potentially a fair bit higher than 38% as we move further into the third and fourth quarter. So we expect this to be a good base and to keep moving it up.

Jason, got a fourth question for you. We've got a list of questions out, Dennison. Can you quickly run through the $6 million nonrecurring cash flow impact?

Just bring that slide back up, Janine. Yes.

Just step through that. Jay, sorry.

Yes. So these are the nonrecurring costs. So you see the JCI, and I'll answer your question, Nicolas, which is the next question relates to the same data set. So the TSA essentially has come to an end. There's a small amount of IT-related JCI costs that we have paid through the half, and I think we make 2 more payments in Feb, but it's a like-for-like cost of what that would cost us to run an IT department. So we don't see it as a nonrecurring, but these are the -- these are the legacy items of the finance support broader IT support, other support. But that's now finished. So that is none -- that is a genuine one-off that we won't see in the back half. Tax paid by ACG and NZ that we are working, so the ACG cash was -- for the FY '24 period, was part of the settlement, was set aside. But obviously, there's a cash outflow. The NZ team, we're working through some transfer pricing models to make sure that the New Zealand business can sort of be shielded by the Australian tax shield, we're working through that currently and we'll have that finalized in time for the FY '25 submission. So general business acquisition and refinancing costs. So obviously, these are one-off in themselves. But obviously, if we buy more businesses, we will have those one-off costs in the back half. But certainly, those costs were one-off in the first half. Project Funnel Web, which what we talked about, was the move of the ADT team into the Signature team and the synergies that we created by reducing the resource cost around the service and delivery teams in both businesses. So that just on 0.5 million, primarily redundancies, was a genuine one-off. And Dennison has spoken about the impact from acquisitions as a one-off as those businesses are now living in their own cash and EBITDA work from trading rather than from settlement. So that's the 6.6 nonrecurring costs that we put back into the operating cash flow for half 1. And I think that answers the next two questions. The EBITDA contribution -- I've got the questions up on the screen, Janine, is that all right? The next question, Dennison, is just about the EBITDA contribution from the WA project that we've called out for December and March. So what we're sort of commenting there is that DVL's December performance was well above expectation. And when we looked into that result, we could see that there was a large progress payment made for works that will continue through to March. So what we will see -- so two things. One, it doesn't really affect our guidance because it's a DVL-based contract. And our guidance was exclusive of DVL. But what we would expect to see DVL trade in Q3 closer to that $2 million EBITDA run rate that we bought the business on? EBITDA guidance...

Yes, I'll just make a comment to just on DVL since -- so the project is firmly said to finish in March. It's actually the rail station project in WA, and that has to get up and running in time for the WA election. So we're doing the security part for that. DVL, though, has worked out for probably 2 years. So it's not going to create a big come-off effect or anything like that. There's plenty of work. In fact, we've just hired [ for ] technicians, I believe, in the last week to go into that business. When we bought that business, and I guess to side step and not to get too deep into these things, but we've been trying to buy these quality businesses of recent times to extend our capacity and range. And I suppose the challenge we've actually been having is that we're buying them, and they're already over trading. And so the first step, I turn up and say, "Hey, we've got this great strategy to get the national commercial enterprise contracts," which we are getting and having discussions on that. "Well, that's awesome and really exciting. But by the way, do you mind trying to find us a few more techs first? Because we've already got enough work ourselves." And so just to foreshadow anybody sort of worrying that, that means DVL is about to sort of -- has had a spike can come off, that's not how we said it. It's just that particular payment process on that particular project caused a spike in EBITDA for December that will sort of flatten out as we go through the rest of the year. Sorry, Jason.

No, no problem. That's probably more reassuring for the listeners. The next, Nicolas, your question around the back half guidance. Yes, so we adjusted EBITDA of 16.9 for the first half. So yes, the implied EBITDA is closer to 21. That is that has always been our forecast for you. We have a really strong pipeline in the commercial businesses that will deliver that result as well as the growth in the video guarding product and not forgetting the residential growth strategy as well with [ Syber Sense ]. The next question is probably going to have to be -- we probably have to take that one offline or I'll circle back. We may be able to cover it in the half year. So the question, Dennison, was there any additional positive one-off revenue effects in Q2 from the transition to 4G? If so, how much were they? The short answer, arguably, would be yes because we definitely have -- we definitely had that in the ADT AU business when they went through the 4G transition, but I would have to take that offline. This was from an anonymous user question, so I'm happy for them to e-mail me directly, and I'm happy to go through that.

I think it would be fair to say though, because I understand the time, I guess, the question as well is that it's not -- I wouldn't call it material, though. Like I know the materiality of it has completely come out of the business, and we're really in tail and drag. The only effect in 3G discussion we will have as we now move forward is actually the New Zealand business, and it is primarily around that medical business. We are -- as I said, we bought the inventory, we've gone heavy on inventory to be prepped for it as that rolls through. But of materiality, it is -- I would argue it's probably ceased, but we can try and get the exact sort of numbers out. But yes, I don't see it as a feature of the business in that second quarter, it wasn't a not a major discussion point for us, and it didn't have the effect. The real impact of it was that first quarter because it was also -- really came about because of the Signature creation and the move into a cash accounting world and out of the capitalization where we also canceled those ADT contracts which were capitalizable, which is a historic legacy thing. So we completely pushed out of the business the ability, essentially, to justify capitalization so that we could see it. And then, of course, we had that impact in Q1, right, there it is. And then we're able to -- we've now fleshed it out, remedied it. And you can see that in the CapEx line and how the CapEx line has come right down, and we're dealing in a real world sort of prop up cash flow business now. Sorry. Thanks.

All right. So then the next question from Richard is regarding the video surveillance product. Can we expect an uptick in costs related to the rollout over the short term? And will this impact margins before we see the start to see incremental benefits? Short answer is no, we won't have any uptick in costs. In reality, our control rooms can already deal with video verification and video monitoring. That was sort of a key part of prior-year investment in technology. The video surveillance product itself or the video guarding product itself is sold to customers and then has an ongoing recurring revenue that is all profitable from day 1. So there's no -- there should be no cost related to that other than the investment cost in the inventory that we covered earlier. The next question is...