IVE Group Limited (IGL.AX) Earnings Call Transcript & Summary

Hi, everyone. Welcome to the IVE Group Full Year FY '25 Financial Results Webinar. My name is Lauren Hayes, and I'm your host for today. On the call, we have CEO, Matt Aitken; and CFO, Darren Dunkley. The format is a 20- to 30-minute presentation followed by 15 minutes of Q&A. [Operator Instructions] Now I'd like to hand over to CEO, Matt Aitken, to start the presentation. Matt, are you there?

Yes. Thanks, Lauren. Good morning, everyone, and thank you for joining the call. Darren and I are pleased to present IVE Group's FY '25 results, a strong result that meets all key guidance metrics provided throughout the last 12 months, including an earnings upgrade in June. Turning to Page 3, the key highlights, just touching on financial performance. All key profit metrics were up significantly on pcp with strong margin expansion. We had strong operating cash flow and stable working capital. And the balance sheet has been further strengthened with gearing sitting well below our internal target of 1.5x pre-AASB 16, and Darren will have more to say on this in the upcoming slides. Operationally, we have realized the full synergies of Ovato. And so that run rate has been fully realized as we've gone through the FY '25 year as the same has happened with JacPak. And during the year, we commissioned extensive consumer research to understand the role catalogs play in today's omnichannel marketing landscape. And whilst this is not the forum to present all of the findings, what I will say is that after surveying thousands of consumers and analyzing over 65 million scanned product records from retailers, that 83% of catalog readers take action after browsing and retailers on average earn $14.50 per dollar invested in catalogs. And our research proves that catalogs truly belong at the heart of modern marketing. This isn't about being nostalgic for print. It's about acknowledging that drive results, sales and market share. That research has been extremely well received by the retailers who work with us today. In relation to sustainability, we're closing out Phase 1 of our ESG strategy, which we'll have -- which we've been executing on for the last 3 years, and I'll have more to say on that later in this presentation as well. And turning to the growth initiatives. The JacPak acquisition continues to proceed well with meaningful new business secured for commencement during FY '26. And the expansion to New South Wales is running to plan and will take its course in conjunction with the new supersite. The relocation into our new 3PL site in Dandenong, Melbourne is running ahead of schedule. And the Sydney supersite build at Kemps Creek is running to plan and will be ready for early calendar 2026 in both those last 2 initiatives, I'll talk further about later in the presentation. And finally, Lasoo continues to perform to expectations with all metrics on track and consistent with our business case and prior communication to the market. As we turn to Page 4, just touching on some of the metrics and the dashboard against pcp. As foreshadowed at the H1 results and investor strategy session in June, revenue is $955 million, slightly down on pcp. EBITDA of $136.7 million was 7% up on pcp. And pleasingly, a strong material gross profit margin result of 49.3% against 46.7% pcp. NPAT of $52 million was 21% up on pcp, and the IFRS NPAT of $46.7 million was 69% up on pcp. EPS of $0.37 was 20% up on pcp. Strong operating cash flow, the net debt at $114.4 million, which Darren will touch on further and a fully franked final dividend of $0.085 per share, taking the full year dividend to $0.18 per share, being consistent with prior advice to the market. If we turn to Page 5 of the investor presentation, just touching briefly on our customer diversity and longevity. No one customer dominates the customer list with the top 20 customers making up 40% of our revenue. Strong long-standing relationships with the average tenure of the top 20 customer exceeding 10 years. This has been a consistent metric for this group for many, many years, and 79% of all of our customers buying 2 or more products or services, which helps drive customer value and stickiness. And this pie chart on the bottom left also illustrates there's still plenty of opportunity to sell more products and services to our existing customers as well. I'll now hand over to Darren, and he'll step you through the financial section of the presentation.

Thank you, Matt, and good morning, everyone. I will now take you through the financial section of the presentation, starting with the underlying profit and loss. Pages 7 and 8. Strong profit growth underpinned by expansion and the delivery of promised revenue. Revenue down 1.6% on pcp to $954.8 million. Base revenue was down circa 3% relative to pcp, which was impacted by the softer economy and uncertainty surrounding the federal election as communicated at our June investor strategy session. Brand activations, 3PL and packaging enjoyed new client business wins, including household brands in FMCG and the pharmaceutical sectors. Material gross profit margin or MGM, which is revenue less material cost of goods sold, MGM improved to 49.3%, up from 46.7% in pcp. The material gross margin improvement reflects input cost relief as well as business mix changes. Underlying earnings, EBITDA up 7% to $136.7 million. EBITDA margin up strongly to 14.3%. That's up from 13.2% in pcp. EBIT up 15.3% to $92.4 million. NPAT margin up strongly to 5.5% from 4.4% in pcp. The strong margin reflects -- strong margin expansion reflects improved MGM, a full period of Ovato integration benefits, JacPak synergies as well as ongoing operational synergies. Nonoperating items during the period, nonoperating items of $9.1 million pretax includes $6.2 million Lasoo operating loss, consistent with guidance or circa $4.3 million after-tax loss and $3 million of restructure costs mainly relating to relocation costs and redundancy costs. Turning to Page 9, the balance sheet. Gearing well below target, resulting in significant debt capacity. Cash at bank $50.1 million. Net debt decreased to $114.4 million from $131 million in pcp, reflecting stable working capital and greatly reduced restructuring costs, partially offset by CapEx associated with the packaging capacity build-out. Gearing is well below the group's internal benchmark of 1.5x pre-AASB 16 EBITDA or less than 1.2x post-AASB 16 EBITDA. Undrawn debt capacity of $72 million at 30 June. Senior debt facility was refinanced for a further 4-year term in May 2025. Capital expenditure on Page 10, packaging capacity build-out underway. Capital expenditure was $25 million, net of disposal proceeds, including $18.2 million related to the packaging capacity build-out largely for the purchase of replacement sheetfed presses capable of printing on board for packaging as well as finishing equipment and the finishing equipment is die-cutters and folders and the like. Due to timing, aligning equipment delivery with the Sydney supersite, circa $7 million of CapEx relating to sheetfed/packaging equipment has moved from FY '25 into FY '26. Cash flow and dividends. Operating cash conversion remains strong with -- operating cash conversion of EBITDA of 101.9%. The high cash conversion reflects stable working capital levels, mainly due to continued lower inventory holdings. Working capital is expected to remain relatively stable hereafter, broadly in line with the revenue and seasonality. Fully franked dividend of $0.085 taking the FY '25 full year dividend to $0.18 per share, stable on pcp and consistent with guidance. I will now hand you back over to Matt to take you through the balance of the presentation. Thank you.

Thanks, Darren. Just turning to Pages 13 and 14 to provide an update on the expansion of our 3PL business. So the area of the business has continued to grow strongly in recent years. With the upcoming expiry of our 3PL warehouse leases in Braeside, Victoria. We decided to take the lease on a brand-new building in Dandenong South and relocating to that site accordingly. That site is 33,000 square meters. It's the largest 3PL site we now have in the country. It provides an additional 60% of storage space for our business and our clients in Victoria and increases our national footprint capacity in this part of our business by over 30%. Handover of the site actually occurred early. It occurred in late July, and we're finishing the relocation into the site currently, and that will complete by October. So ultimately, 6 weeks ahead of schedule on that entire project. As you turn to Page 15 of the supersite, again, replicating what we did down in Braeside in Victoria several years ago. We have committed to a 42,000 square meter supersite in Kemps Creek in Western Sydney. It's consolidating multiple sites for us, multiple existing sites for us from our Western Sydney locations with -- and it's helping mitigate the full impact of rising industrial rents in Western Sydney and will deliver meaningful operating efficiencies and capability expansion, all of which is consistent with our strategy. It also facilitates the group's strategy of expanding into horizontal adjacencies such as packaging, as we've spoken about to drive further revenue growth and operational efficiencies. So 4 main business units relocating to this site, one from Silverwater, one from Granville, one from Homebush and one from Warwick Farm, along with the build-out and establishment of a brand-new greenfields packaging facility to support the growth of that strategy. The site is close to key transport hubs. It's close to our other facilities in Erskine Park and Huntingwood and thereby brings together the majority of our Western Sydney staff within about a 10-minute drive of each other. The groundworks commenced in December 2024, and we are on track for completion of this building per plan, which will be the end of December 2025 or early January 2026 and would expect to have relocated our businesses into the site by March 2026, everything running to plan with that project as well. Just touching on sustainability on Page 16. In FY '25, we continued our strong progress against the 47 initiatives that we captured within our 2025 sustainability strategy. This included strengthening our reporting frameworks, scaling initiatives that reduce waste, driving social value and improving environmental performance. We also advanced social procurement, deepen the partnerships that we have in play in the space, improve leadership diversity and launch core database lines across energy, emissions and waste. These actions build on the key initiatives that we had already undertaken in 2023 and 2024, bringing our strategy to life and laying the foundation for continued impact as we move forward to our calendar 2025 goals. It also sets us up well for the years ahead as we look to establish our 2026 to 2030 strategy by later this year. And you'll see on Page 17, we provide a level of insights into the FY '25 progress against some of those initiatives that I've just mentioned. If we turn to Page 19 and then move on to outlook and guidance. The group's FY '26 underlying NPAT guidance range is $50 million to $54 million. This includes a $2.5 million adverse after-tax noncash AASB 16 timing difference due to the assumption of significant new long-term property leases at the 2 sites I've already spoken about, Dandenong and Kemps Creek, and this will reverse over the life of the leases. It's pre-AASB 16 impact in FY '26. Our result or our guidance also excludes the expected Las operating loss of circa $4 million post tax, which is an improvement over FY '25 and sets us up to see significant further improvement in FY '27 as previously foreshadowed to the market. And it also excludes costs of around $10 million post tax, primarily associated with the Dandenong and Kemps Creek relocations, including duplication of rent until expiry of the old leases during calendar 2026. Before I go on this slide, I might just pause and ask Darren just to touch on the AASB impact of leases so that everyone is clear on what we're communicating here and how that's playing itself out.

Yes. Thanks, Matt. Yes, as Matt stated, guidance allows for an adverse noncash AASB 16 timing difference of circa $2.5 million NPAT loss due to the assumption of significant new long-term property leases of Dandenong and Kemps Creek. This is due to rent expense being replaced with depreciation and interest expense in the P&L with larger negative impacts in the early years, which reverse in later years due to taking into account annual lease increases and the present value of interest payments over the life of the lease. That is interest expense reduces as the lease unwinds. AASB 16 impact is 0 and is noncash over the full life of the lease.

Thanks, Darren. Capital expenditure, as Darren has mentioned, will be circa $42 million in FY '26, reflecting the remaining packaging capacity build-out. This also includes $7 million that moved from FY '25 into FY '26 as well as $18 million relating to the Dandenong and Kemps Creek fit-outs. The group's annual dividend is expected to remain steady at $0.18 per share. And I would close on saying that diversification remains a core element of our growth strategy in FY '26. Our strong balance sheet supports further acquisition capacity, and the group is actively looking for strategic attractive and accretive acquisitions, particularly in 3PL, merchandise and apparel as well as in creative and content. So in closing, I'd like to thank our 2,000 staff for all of their contributions to delivering a very strong FY '25 result that achieved all key guidance measures provided to the market during the year. Thank you for joining our call this morning. We are now happy to take questions.

[Operator Instructions] Our first question comes from Chris Savage from Bell Potter.

Forgive me if I'm diving into this timing difference thing. So if it's $2.5 million after tax, I'm guessing it's $3.5 million before tax.

Yes. Well, I mean you've got it, yes. You're Correct.

And it's in D&A and interest.

Yes, it's mainly -- the main impact is interest. Yes.

Okay. So it's $3.5 million roughly this year. And can you give us an idea how it decreases in subsequent years because I'm guessing it doesn't.

So I haven't got the full amortization schedule in front of me, Chris. But basically, what happens is we value the lease liability over the -- of the term on our balance sheet. So it's a 15-year lease. We present value that and then that unwinds over the life of the lease. So in the earlier years, there is an NPAT loss related to the lease. And in the later years, that reverses and interest expense reduces and there is no NPAT losses in the later years. Over the full year term of the lease, there's no impact of AASB 16. It's 0.

But it sounds like there will be another impact next year. It will just be a bit less than subsequent years.

Correct. That's right. Yes. We take it up on the balance sheet and it unwinds over time.

Yes. Cool. And just a follow-up question on gross margin. I know you don't -- I mean, great result, obviously, in '25, up at 49.4%. I know you don't like us analysts to get too excited about that gross margin though, Darren, should we -- can we maintain that level going forward? Or you'd rather it be a bit lower in our models?

At this stage, I don't think there's any reason that the gross margin can continue to remain stable. We haven't seen anything in our purchasing that suggests that, that would decrease over time. And partly, our gross margin also reflects our work mix. And as our work mix changes as well, that has impacts on our gross margin. But if anything, it definitely will remain stable moving forward as far as we can see.