IVE Group Limited (IGL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IVE Group Investor and Analyst Call for their financial results for the first half, being 6 months to December 31, 2020. [Operator Instructions]. I would now like to hand the conference over to Mr. Geoff Selig, Executive Chair. Please go ahead.

Thank you, and good morning, everybody, to our results call this morning. We will work our way through the investor presentation that was uploaded to the ASX a couple of hours ago. I'm joined this morning by our Chief Executive, Matt Aitken; and our Chief Financial Officer, Darren Dunkley, who will be all speaking through the course of the presentation this morning. Just by way of introduction, I'll cover Slides 3 and 4 collectively, and then I'll hand over to Matt to walk us through the financial results after that. So beginning with revenue, which Matt will talk on in a little more detail shortly, $340.8 million worth of revenue, impacted clearly still by COVID, and Matt will walk through the various impacts of that. A strong EBITDA number of $59.2 million and net profit after tax number of $23 million impacted those 2 metrics by a reduction in revenue on PCP. Pleasingly though, our gross profit margin remained consistent with FY '20 as it has been for some time. And I think, those 2 metrics also demonstrate our capacity as a business to flex our cost base to mitigate the short-term revenue impacts, but also flexing the cost base that will ultimately strengthen the business on an ongoing basis. If we just move on to the balance sheet, which we'll talk to in more detail a little later, it's significantly stronger over the balance sheet this time last year. $94.6 million cash on hand, our net debt is down to $90.1 million, which is $89 million lower than what it was really at the higher point at the end of March last year following the acquisitions of the Salmat Marketing Solutions and Reach Media New Zealand. And as foreshadowed at our AGM and previously, we have declared an interim dividend of $0.07 per share, fully franked, and that is clearly on the back of not having a dividend at all over the course of the last year. A couple of other things to point on more specifically, I suppose, on Page 4. Firstly, the divestment of our outbound call center IVE Telefundraising, it's really the first business that this group has sold, and the business that we sold was a vastly improved business to what we bought in October 2015. So for strategic reasons, we've decided to sell the business, $16.5 million, all of cash consideration, represented a 5x multiple of EBITDA, FY '20 EBITDA, and a profit on divestment of $4.2 million. So from our perspective, a good outcome and nice to bank the proceeds of that divestment. We also undertook a share buyback that was announced on the 12th of November last year, and as at today's state, we had acquired just under 1 million shares as part of that buyback. And then finally, as previously communicated, we executed a long-term contract with Australian Community Media, 5G contract. And part of that partnership with them was the acquisition for $2 million of selected assets in the main property, plant and equipment in Western Australia. So that would be the snapshot in terms of the financial highlights and the summary. And at this point, I'll hand over to Matt to pick it up from Page 7 on.

Thank you, Geoff, and good morning, everyone. So I'm just going to cover the key aspects across Pages 7 and 8 of the investor presentation. Revenue, as Geoff said, of $340.8 million to PCP, was of $352.2 million, includes Letterbox Distribution revenues, so the old Salmat business of $53.5 million. And we estimate a revenue reduction to PCP is circa $50 million as a result of the impacts of COVID-19, particularly in the retail catalog and d travel sectors, where we have seen the most declines in revenue through the period of COVID. Revenue reduction to PCP of circa $12 million reflects the impact of Coles ceasing to produce the letterbox vision of their weekly catalog from the start of September 2020. And as you will note later in the presentation, we comment on our strong and meaningful relationship that we still have with Coles today across other aspects of their business. Gross profit margin, as Geoff said, was consistent with PCP at 47.3%, and paper pricing has continued to reflect the benefits of improved pricing relative to PCP. However, as maybe now, to some investors, there is upward pressure on freight and pulp, but the strengthening of AU dollar against the U.S. dollar is mitigating some of that impact, and we are confident through H2, we won't have a material issue in the space around raw materials. We'll continue to work closely with our supply chain partners. EBITDA of $59.2 million, inclusive of JobKeeper receipts of $14.1 million to PCP of $49.9 million. The business leveraged and streamlined the cost base further throughout the period. And really, over the last 9 months, we focused hard to ensure that we flex their business as we encounter the impacts of COVID-19. And through that time, we've closed 3 sites here in Australia. We've completed the Salmat integration. We've largely exited Salmat's Philippines operations, which has seen a reduction of 95 heads out of the Philippines. We've relocated businesses, and we've continued to refine our organizational structure as we responded to the impacts of COVID-19. EBITDA margin of 13%, excluding JobKeeper to PCP of 14.2% and at net profit after tax level, NPAT, of $20.8 million, inclusive of JobKeeper to PCP, $15.9 million and impact of $10.5 million exclusive of JobKeeper to PCP of $15.9 million. I'll now ask Darren to take you through Pages 9 and 10 of this presentation.

Thanks, Matt, and good morning, everybody. So I'll just take you through Page 9, net debt and capital expenditure. Net debt of $90.1 million reflects a further reduction of $47 million from 30 June '20, and also, as Geoff had previously mentioned, an $89 million reduction from a higher point of March -- at the end of March '20, and that was post the Salmat acquisition. Cash at bank is a very strong number of $94.6 million, and our working capital facility of $30 million remains fully undrawn. The low net debt result reflects earnings, including JobKeeper receipts, coupled with reduced working capital as well as the net proceeds from the divestment of the IVE Telefundraising. Capital expenditure. As previously foreshadowed, after a period of investment, capital expenditure has significantly reduced in recent years with H1 FY '21 CapEx of $4.5 million. This is made up of a combination of targeted investment case CapEx as well as maintenance CapEx, continued investment in the group-wide MIS upgrades. They are progressing well and are in line with our planned rollouts. Capital expenditure excludes the acquisition of land and buildings and plant and equipment relating to the ACM's WA operation of $2 million. Our full year forecast for capital expenditure is expected to be approximately $10 million, as previously communicated. Page 10 is cash flow. Very strong cash flow -- cash generation for the period with 119% free cash conversion to EBITDA, an excellent result. And that is reflecting a significant reduction in working capital, driven by excellent debtors collections, reducing our debtor days to a prior corresponding period, targeted reduction in inventory holdings, down $9 million from 30 June '20. Should also be noted that there were no bad debts during the period. Share buyback. Now as you are all aware, I've commenced the share buyback program in December '20 with shares repurchased to date of 990,000 at a cost of $1.3 million. The company will continue its buyback in line with previous announcements. Earnings per share. Earnings per share, on an underlying NPATA basis, is $0.16 inclusive of JobKeeper, and $0.09 excluding JobKeeper, prior corresponding period of $0.12 per share. And just on the dividends, it has been well communicated that IVE caused its dividend, at the start of the COVID pandemic due to the prevailing economic uncertainty, which at the time, was prudent for the business to do so. Given our strong balance sheet and high cash generation, the Board has reinstated its dividend with an interim dividend of $0.07 per share fully franked. Thank you. I'll just hand you back to Matt.

Thanks, Darren. So if we just turn to Page 12, I'll just touch on some commentary around customers and revenue. Core to the ongoing sustainability of our business is the value proposition we take to market ensuring we remain relevant by closely aligning our clients' evolving requirements. The diversity of our offer and capability to bundle solutions places us in a strong position relative to a number of competitors across the sectors in which we operate. And we do not have one headline competitor that has an equivalent breadth of offering, and as such, we continue to hold prominent market positions in our sectors. Pleasingly, we had strong new business momentum in H1 with $30 million of annualized new client revenues secured through that period. This revenue growth was across the entire group and in addition to the 18 contracted chips referred to earlier. Specifically, we secured the Letterbox Distribution contract for Spotlight Retail Group across Australia and New Zealand. And this further expands our already substantial relationship we have with SRG that spans catalogs, personalized customer communications and point-of-sale requirements for their Spotlight and Anaconda brands. We were also funded in H1 to manage all of the point-of-sale marketing, kitting and fulfilment for Greencross Vets and Pet Barn. And whilst early days, we're already seeing further opportunities to expand our product and service offering through PPE and Hygiene products and uniforms and apparel. Moving on to Page 14 and 15, these examples illustrate the diversity of our offer to customers, and in particular, how we continue to grow share of wallet through our diverse range of products and services. This diversity in our customers is something that we can talk about for hours and provide countless examples of -- however, I just wanted to focus on a few examples this morning. We've gone deeper into the retail vertical by achieving HACCP certification at our retail display and integrated logistics sites. This has enabled us to grow the revenue opportunity and create a point of difference amongst our competitors in the sector by leveraging our combined retail display production expertise with our substantial existing capabilities in logistics and move into the product co-packing space for our FMCG clients. During H1, we've already seen strong take-up of the service by existing in new clients across the areas of food, batteries, toys and dental products, to name a few, for our customers who are achieving great speed to market, reducing their marketing supply chain costs and are achieving greater merchandising compliance within their retail standards. You'll see some of the inventory relating to McDonald's and Blackmores in the presentation. McDonald's has been a long-term client of ours. And whilst we've always supplied a lot of physical products for McDonald's, be that tray macs or point-of-sale in the restaurants or general collateral and merchandise, you'll see in H1, we've been producing engaging and dynamic training videos for them as part of their $40 million per annum commitment to employee training. So utilizing our creative services capability, we're managing everything from concept development through the illustration, animation and video production for McDonald's. And you can also see that we've created the McDelivery Car Wraps there for their delivery fleet, and these were really well received by franchisees and the local communities that they're still a very favorite to drive into. From the Blackmores perspective, another client we've had a long-standing relationship with providing point-of-sale and logistic fulfillments, we've now expanded into providing crowded services for their digital and social media asset requirements across their own digital ecosystem as well as for environments like the Amazon Web Store. We have continued to grow and strengthen our partnership with Woolworths as we provide a wide array of services, whether that is through their store network or directly to their customers or the consumers. We're partnering Woolworths for managing customer communication requirements for the Everyday Rewards Program, managing catalog distribution to millions of letterboxes each week, providing staff uniforms for promotions and launches and producing in-store marketing campaigns, be that temporary point-of-sale or permanent fixture requirements like the [indiscernible] around the freezer section and the [indiscernible] on Page 15 of this presentation. As many of you would know, we have a substantial capability in data-driven communications. It accounts for about 400 of our staff. What you may not know as well is that we are one of the largest Salesforce marketing cloud practices in Australia, along with a substantial capability in the Diageo marketing technology stack too. In this space, we are providing consulting services to many of Australia's largest companies. We're really proud of our partnership with Nufarm and the work we have done with them on the global integration and rollout of their Salesforce platforms, allowing Nufarm to be better connected with their customers. Having completed the North American rollout, we are currently working with on the deployment in Australia and New Zealand, ahead of turning our attention to planning for Europe. As I said earlier, we could talk about the diversity of our offer and customer relationships to ours, but hopefully, some of the ground I just covered gives you a good flavor for this. If we turn our attention to the outlook statement on Page 17, the FY '21 full year underlying EBITDA is expected to be consistent with FY '20, being $100 million underlying EBITDA for continuing operations. Gross profit margin is expected to remain stable over the remainder of FY '21. Full year capital expenditure is expected to be approximately $10 million, as Darren foreshadowed. Full year restructure and acquisition costs are expected to be approximately $4 million. And forecast net debt at 30 June 2021 will be between $90 million and $100 million. Before handing back to Geoff, I'd like to acknowledge the contribution of all of our staff during H1, the leadership shown by our senior leadership team and the ongoing support of the Board. Back to you, Geoff.

Thanks, Matt, thanks, Darren. Look, just in wrapping up, just to summarize just a few of the key points. I think, from our perspective, the strength our client relationships, the wonderful staff we have, the flexibility of our cost base and the company's capacity to respond to the impacts of COVID in the half, in fact, the whole of last year than in the half that we're talking about, ultimately came together to deliver what is a very solid financial performance for the business. The strong free cash flow has resulted in continued higher levels of liquidity. And we've seen a very meaningful reduction in debt since March of last year. And it's nice to see the resumption of the dividend through the declaration of the interim dividend. So from our perspective, notwithstanding some of the challenges over the last 6 months, the Board, the team and the business is very satisfied with where we've landed in the first half results. So I'll leave it at that. And thank you all again for your time, and we can move on to Q&A.

[Operator Instructions] The first question comes from Shane Bannan with Bligh Capital Securities.

[indiscernible] Could I just get you just recover the impact on revenues, I think you made a comment that COVID had an impact of negative $50 million on revenue being the Salmat contribution coming, which compensated for that. But then you have the $12 million loss of the Coles contract in the back end of the year or back end of the period, I should say. Is that the reconciliation premium in revenue? Is that correct?

That's correct, Shane. So Letterbox Distribution revenue a Salmat revenue of $53.5 million in the half. We estimate the impact of COVID on the revenue line PCP to be about $50 million. Very specifically, in the retail catalog and travel sectors or most meaningfully, in most sectors in terms of how it's affected our business and the revenue reduction to PCP of $12 million relates to Coles [indiscernible] Letterbox catalog at the start of September.

Right. So just pushing the dynamic into the current period, seasonally weaker typically by a little bit, probably accentuated by Salmat itself. And just trying to understand the impact of the loss of the JobKeeper coming into the current period, you're forecasting implicitly a lower EBITDA anyway. But that's probably reflected by the revenue as much as the loss of JobKeeper. Is that correct?

Yes. Shane, it's Darren here. I mean, we're fully forecasting in line with FY '20 results. And as you're aware, we are no longer eligible for JobKeeper, so there'll be no JobKeeper in the H2 result.

Right. And that's probably a large part of the step-down. The rest of it is just the seasonality around the revenue line.

Yes, yes, that would be right, Shane.

Yes.

And so only thing. I mean, one of the points Geoff made, nothing you made before, is that you're quite capable of flexing the cost line. So the presumption is, if you're looking at $100 million of your base level EBITDA on a go-forward basis, we're still saying we can do without the JobKeeper because ideally, the revenue should be building back as things return to normal in the commerce, and we should be able to retain a gross margin on that.

That's correct.

Yes. The revenue hasn't quite returned to normal at this point. And I think, if you talk about the Q4 of FY '20, we had an $80 million to $90 million revenue hit in that quarter alone as a result of COVID. And in this half, we got a $50 million PCP just talks the impacts of Coles. So less significant revenue hit and under a 6-month period, but equally, it's somewhat of a mixed bag out there because you've got retailers that are delivering some very, very strong results, but they have a lot of products on backorder as well and JobKeeper has still been floating around the economy. So it's an interesting set of dynamics playing themselves out, which some are positive and some when companies are doing so well for you, maybe they don't need to spend quite as much on marketing. So -- but it certainly has improved from where it was 6 months ago.

And lastly, could I just ask you to just give us a bit of a feel for the Salmat business now? I mean, that presumably is quite a been barely affected by what's transpired. Just your understanding of the dynamic or appreciation of the dynamic coming to this period and ideally into FY '22, how is that stacking up? And how that's relevant from the overall scheme of business?

Yes. I think -- so first of all, we wouldn't want to go through this period without controlling that last mile of delivery for the Letterbox chain. So we're very pleased that strategically, we have the Salmat business and now stable in that product and service offering as part of our bundled solutions we take to clients. We've done a lot of work through calendar 2020 to really refine the Salmat business, both from a cost base perspective, but also from a market offer perspective. And it's a very strong business. It still has the leading distribution network in Australia. By far, that's the largest market share in our opinion. So look, it's a core part of our offer moving forward, particularly as we look to self-explore what other things we could do with 14,000 workers going to 7 million letterboxes every single week.

And that capacity is still being retained from the sale of that?