IVE Group Limited (IGL) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to the IVE Group FY '21 Results Presentation. On the call today, Executive Chairman, Geoff Selig; CEO, Matt Aitken; and CFO, Darren Dunkley. Also assisting Richard Nelson, Investor Relations Manager. I'd like to now hand over to Geoff to begin the presentation. Over to you, Geoff.

Thank you, and good morning, everybody, and appreciate you making the time to dial in for the IGL FY '21 full year results call. We are nearly halfway through our centenary year. It doesn't quite feel like it, but in 1921 -- in March 1921, my grandfather issued the first issue of a local newspaper in Balmain. So hopefully, towards the back end of the year, we will appropriately celebrate our centenary year. Just before dialing into the investor presentation today, just once again to introduce the team with me our CEO, Matt Aitken; CFO, Darren Dunkley; and Richard Nelson, who heads up our Investor Relations. Well, given the year of unprecedented volatility and uncertainty, I'd like to acknowledge upfrontly capacity of our people as we respond to the circumstances we found ourselves in by coming together as one company and committing to go above and beyond and to care for each other. It was a huge team effort, and I think our results demonstrate this. Clearly, the entirety of FY '21 year for IVE would best be described as COVID-impacted. We've provided quite some detail this time last year in our full year results presentation around our swift response to the impacts of COVID in Q4 FY '20. And it's fair to say many of the impacts we touched on at that time prevailed throughout the FY '21 year, that being the health and safety of our staff, managing supply chain issues, the tight management of working capital, the need to flex the cost base in response ultimately to what was huge volatility in revenues throughout the period. We feel the solid financial performance of the business, our significantly strengthened balance sheet demonstrate the resilience of the IVE business and position the company well, which we'll talk a little later about, deliver the -- to deliver strong growth as we emerge from this period a disruption. So with that preamble, I'll, behind us, move to the Page 3 of the presentation that we lodged with the ASX this morning titled the Financial performance dashboard. Just make the point that all numbers are underlying on a continuing operations basis. We divested the company throughout the year and are post-AASB 16. We've also tried hard to be very clear throughout the presentation with our numbers, both including JobKeeper and excluding JobKeeper. So if I just look at the 8 tiles on the performance dashboard, we'll dive a little deeper shortly as we go through the presentation. Revenue at $656.5 million, a little off last year, which we'll touch on. EBITDA, excluding JobKeeper, $85.3 million up on last year. Gross profit margin increased in a meaningful way above last year, sitting at 48.1%. Once again, net profit after tax up at $19.9 million, excluding JobKeeper. That resulted in an earnings per share uplift of 8.4% on PCP, and the result of continuing strong operating cash flow. Our net debt landed at 77.3%, which was lower than expected a couple of months ago, with cash on hand at $107 million. The final dividend of $0.07 is the same as the half year dividend of $0.07, which results in a full year dividend of $0.14, obviously. So that's the snapshot of the financial performance for the year. I'll now hand over to Matt to walk us through, commencing with Page 4, the key business highlights.

Thank you, Geoff, and good morning, everyone. As Geoff has mentioned, earnings guidance has been met, strong cash flows have delivered increased balance sheet strength, all of which illustrates the underlying resilience of this business. Earnings of EBITDA, $100.2 million, was at the upper end of our guidance range, which was $98 million to $100 million. And the margin growth continued to improve despite reduced revenue, with much of this achieved through flexing our cost base and the management of our supply chain. I'm also very proud of the contributions made by all 1,600 staff during the year as they responded to an unprecedented and volatile operating environment. We have an awesome team. During the year, we executed on 2 key strategic initiatives that were also communicated at the half year results. The first being the divestment of IVE Telefundraising in October for consideration of $16.5 million, realizing a profit on sale of $4.2 million. And the second being the commitment to a long-term contract with ACM, which included the acquisition of their production operation in Western Australia. This transaction was expected to deliver revenues of $20 million per annum at a full run rate, and I'm pleased to advise we have now reached that point. Since buying, the WA operation has performed really well, and we have a great team over there, we've also been able to transition some volume from our East Coast operations to WA to better assist our national clients. The strengthening -- turning to Page 5, the strengthening of the balance sheet is one of our real highlights for F '21, with strong cash flow generation and operating cash flow of 131%. Net debt was reduced by $59.8 million to $77.3 million, with net debt pre-AASB 16 EBITDA ex JobKeeper now at 1.3x. Cash on hand at 30 June was $107 million. And since year-end, we have repaid $50 million of our senior debt facility. We have also continued to focus on improving shareholder returns with EPS growth over PCP at 8.4%, and the resumption of dividends in FY '21 with a final dividend of $0.07 per share, fully franked, taking the full year dividend to $0.14 per share, fully franked. As you would also be aware, the company announced a share buyback in November and as at today, has acquired 5.4 million shares or 3.6% of issued capital at a total cost of $7.4 million. As we have illustrated already, the company is in a strong position to fund growth initiatives with latent balance sheet capacity of $30 million to $40 million available to pursue earnings accretive initiatives or further capital management. And we will pick up on this later in our presentation. Throughout the year, IVE has continued to benefit from its differentiated value proposition and a loyal, strong and diversified customer base. We provided continuity of service and supplied all customers throughout the pandemic with no COVID-related operating issues at any of our sites. We continued to grow our share of wallet across the customer base as we sell more of our products and services to our 2,800 customers. And our long-term track record of retaining clients ensured more than $100 million in contract renewals was achieved during the year across a multitude of customers big and small, and some of these include the likes of Woolworths, Westpac, L'Oreal and more. Importantly, there was no material loss of any client in FY '21. From a growth perspective, there was continued focus on growing market share through harnessing the power and uniqueness of our go-to-market proposition. New business momentum across all parts of the business remained strong. And despite the challenges of COVID, $58 million of new clients were onboarded during the year. And again, some fantastic brands, big and small, with the likes of Bunnings, Officeworks, Simplot, Colgate and many more joining the IVE stable. Pleasingly, the strong new business momentum from Q4 FY '21 has continued into FY '22 with a number of key customers already secured in this new financial year. We are very fortunate to have a strong reputable -- very fortunate to have strong reputable customers, and we are very grateful for their ongoing support. I'll now hand over to Darren and ask him to take you through the financial results in more detail.

Thank you, Matt, and good morning, everyone. I will now take you through the financial section of the presentation, starting Page 8 with the profit and loss, which is presented on an underlying continuing operations basis, excluding JobKeeper. Improving metrics despite full year of COVID-19 impacts. Revenue of $656.5 million, a net reduction of $20.9 million or 3.1% on prior period. COVID-19 resulted in reduced base revenue of $75.6 million over prior period. Main sectors impacted were catalogs, travel, events and exhibitions. This was offset by an increase in revenue of $54.7 million over prior period due to the full year benefit of the Salmat acquisition acquired in January '20 and the part year benefit of ACM acquisition in November '20. Our gross profit, which is revenue less material cost of goods sold, that is that excludes direct labor and direct factory overhead, remains very stable to historical levels and is assisted by the diversity of our revenue streams. Pleasingly, gross margin improved on FY '20 due to a combination of reduced outwork and management of our supply chain. Improvement in EBITDA and NPAT margin, driven mainly by increased gross profit as well as continued leveraging of our cost base, resulted in EPS growth of 8.4%, notwithstanding the COVID-19 impacts on reduced revenue. If you just move to Page 9, we have -- this year, we have included an EBITDA bridge. The main points I would just like to emphasize is EBITDA growth in a challenging environment, which was driven by net gross profit improvement despite a net reduction in revenue with overall gross profit margin increase on prior period. Continued flexing and management of our labor and overhead costs with base business cost reductions of $11.6 million over prior period, normalizing for the cost increases associated with the acquisitions. Our main point here is as revenue returns, we are well placed to continue to leverage our cost base, supported by a stable gross profit margin. Our balance sheet strength on Page 10. Cash -- strong cash generation over the period has substantially reduced our gearing levels. Net debt down $59.8 million from June '20 take us to a level of $77.3 million net debt, driven by significant operating and free cash flow as well as the sale of Telefundraising during the period. Net debt of 1.3x EBITDA, which is on a pre-AASB 16 and excluding JobKeeper basis, which is well below our stated target level of 1.5x. As at 30 June, our working capital facility of $30 million is fully undrawn and remains undrawn as at today. Given our strong cash generation during the period, the Board decided to repay $50 million of senior facilities on the 6th of August, meaning reduced finance costs in FY '22. Our senior debt facilities expire in April '23. Our balance sheet strength cornerstones our capacity to execute on growth initiatives in FY '22 and beyond, which Matt will touch on shortly. Page 11, capital expenditure, continues to normalize following the completion of major investment and expansion initiatives over recent years. And as a result, we have an operational footprint that is in excellent shape. Full year capital expenditure of $8.7 million, excluding MIS upgrades of $4 million. FY '22 capital expenditure is expected to be circa $10 million, excluding $3.5 million to replatform and transition the Lasoo business. Matt will touch on this shortly also. We often get asked, what is our CapEx spend relative to our depreciation expense. And it's important to note that the ongoing base business CapEx is expected to be approximately 60% of depreciation, excluding AASB impacts. Cash flow generation and dividends. Continued strong free cash flow driven by operational performance and excellent working capital management. Strong operating cash flows of $97 million, with 131% operating cash flow conversion of, 110% in prior period. Disciplined management of working capital, including reduced debtor days over the period, debt aging improvement and reduced inventory levels. Dividends. Reinstated dividend in H1 FY '21, final dividend of $0.07 per share fully franked taking full year dividend to $0.14 per share fully franked. Return on funds employed increased from FY '20 of 12.4% to 15% in FY '21. Share buyback update, Matt has already touched on previously. But as of today, the 25th of August, the company has acquired 5.4 million shares at a total cost of $7.4 million. The average buy price per share is $1.37. This represents 3.6% of issued capital, and shares on issue now 142.8 million. Lastly, but importantly, in recognition of the extraordinary efforts of all of our employees over the last 18 months, the Board intends to issue 500 shares to every employee of the company in FY '22. This concludes the financial section of the presentation. I now will hand you back over to Geoff. Thank you.

Thanks, Darren. So I'm now talking to Page 14 of the investor presentation titled Strategy, diversification and growth opportunities. Prior to talking about the right-hand side of that page, it's important for us to just reflect on the journey the company has been on. This is not a 5-minute roll up. It's a company that's been around for a long time, and it's been a very deliberate strategy for a long time, for a long period, certainly, over the last 20 years to diversify the offering of the business. And that has certainly been the cornerstone of our strategy. Certainly, since listing in late 2015 strong free cash flow combined with access to capital really has enabled the company to successfully execute on a more transformational investment and growth program that further expanded our integrated communications offer to our customer base. The result of our long-term strategy and essentially diversification and growth has delivered today, what is in our view a highly resilient business, which has been demonstrated by our performance in our metrics over the last 18 months. And some of the slides coming up that Matt will talk to illustrate exactly that point. So from our perspective, the strategy that we articulated and the course we set 20 years ago has served us very well. So if we then turn our mind to where we are today, this really is a continuation of our strategy through actively pursuing the current growth opportunities. And as both Matt and Darren has said before, we have the capacity in our balance sheet to fund $30 million to $40 million in growth initiatives in the foreseeable future. We have a minimum ROFE target of 15%, and it would be our intention to invest wisely, but to not leave the cash sitting in the bank. We need to be disciplined about it, but there are a range of initiatives and opportunity in front of us today that the company is actively pursuing. Matt will talk shortly about the Lasoo investment, which I'll skip over. But certainly, there's a couple of complementary adjacencies. And we have a long track record of moving into complementary adjacencies like we did in retail display in '14 and premiums and merchandise in '15. This time around and in front of us at the moment is expanding our fiber-based packaging presence, both organically or potentially through acquisition in that sector. And we have a very extensive integrated logistics operation across New South Wales and Victoria, 45,000 square meters under roof for our existing logistics customers, and we're looking to expand that into a pure more 3PL operation as well. And we've also, as we come out of COVID, see a number of opportunities in the competitive landscape for us to look to a number of bolt-on acquisitions over the next couple of years. The type of acquisition that we have executed on multiple times over the last 20 years in terms of low risk, low multiples and a nice earnings kicker for the business. But really, from our perspective, it is a continuation of the strategy that has served us well up until this point. I'll now hand back to Matt, and he'll just walk us through some of those initiatives starting with our investment in Lasoo.

Thanks, Geoff. So look, Geoff has just outlined the company's intention to pursue a range of strategic initiatives. One of those is the expansion of our existing digital offerings, which are already broad and significant. Over the next 6 to 9 months, we'll be investing $3.5 million in enhancing and amplifying the Lasoo platform that we acquired last year. Lasoo is one of the largest digital catalog consumer platforms in Australia, so both apps and website. It has a loyal and active consumer following, as you can see from the metrics displayed on the slide, along with a diverse and growing base of Australia's leading retailers. And this provides us a solid foundation as we invest further to improve the consumer experience, and work with our retail clients to unlock opportunities to drive further revenue for their businesses. So we will have more to say about this in the coming months to investors ahead of our launch in early -- or relaunch in early 2022. In relation to the market positioning slide on Page 16, we provided this information last year in the FY '20 results deck. So this is being restated for you based on FY '21 data. And the slide really reiterates the strong market position IVE holds across a number of its key sectors, and the diversity of the sectors within which we operate. This is some new data this year. This revenue diversification slide really illustrates the execution of our strategy and how it's resulted in an increased diversification of revenue streams, broader client relationships and also provides for margin protection. Quarterly ongoing sustainability of our business is the value proposition we take to market, ensuring we remain relevant by closely aligning to our clients' evolving requirements. A large proportion of our clients engage us across multiple parts of our business, and you can see how the product and service capability on the right-hand side of the slide illustrates the natural connection between our value proposition and the client's marketing needs. We expect revenue growth across all parts of the business in a post-COVID-19 environment and are ideally positioned to capitalize on opportunities to grow market share across multiple sectors. As we consider organic and inorganic strategic initiatives, I would expect you would see further diversification of our revenue mix moving forward. As you can see from this slide, margins have been resilient despite COVID-19 impacting revenue over the last 2 financial years, stable margin in the face of these revenue impacts, supply chain challenges and the broader macroeconomic climate illustrates the strength of our business fundamentals. You can also see our balance sheet flexibility increases as operating cash flows increase and capital expenditure normalizes. The business has the capacity to generate high levels of cash, which supports our capacity to invest and pursue the strategic initiatives we have touched on in the previous slides. And it also supports our dividend policy as well as allowing for our share buyback. So from my perspective, the business is clearly match fit, has a strong balance sheet from which to execute growth initiatives, has great operating leverage and is ready to benefit from the improved trading conditions as the economy reemerges from these lockdowns. So I'll now hand you back to Geoff to take you through the outlook statement and provide some closing comments. Thank you.

Thanks, Matt. And certainly, those 4 slides around market positioning, revenue diversification, margin stability and cash flow really come from our perspective, validate the strategy and the resilience of the business, as I said before. So just turning to the final Slide 20 being the outlook page. From our perspective, the solid underlying fundamentals of the business, combined with the strength of the balance sheet, place us in an ideal position to deliver strong growth as we emerge from this period of disruption. If we look at FY 2022 more specifically, we're not able to provide guidance at this time, but we do point to the resilience of the IVE business over the 18 -- the last 18 months, which is important. We would expect that resilience to continue through this current period. It is fair to say that the August 2021 is very different and very much an improved operating environment to what it was this time last year with even more uncertainty around. Yes, we are seeing some short-term impacts to revenue as a result of the current lockdowns. In saying that, we're not geographic specific business. We have a national client base, and we have dual operations. So we don't really think about any impact to revenue in terms of specific geographic lockdowns. But we are seeing some short-term impacts to revenue across the existing customer base. However, as Matt pointed to previously, good new business momentum in FY '21 is carried over to H1 this year, and we certainly had solid growth in our retail distribution business with some very meaningful wins over the last 3 months. Our view would be that post the vaccine rollout, which is in sight -- which was in sight this time last year. And as the country opens up, as they say, we would expect to see advancing clients spending to drive consumer sales. And to pick up on Darren's point before, on a reduced cost base that we now have, as revenue returns, we certainly have the potential to leverage that reduced cost base and improve margins further. Just looking a little more forward we would expect revenue growth across the business over the next 24 months, driven by the post lockdown recoveries I just touched on and further improved market positioning in key sectors. We've come out of COVID in a very strong position. We operate with multiple competitors across the landscape we operate in, the sectors we operate in. So we would expect that our market position will improve in some of those key sectors. The heightened operating leverage as I just referred to before; the $30 million to $40 million that we have available while still preserving a strong balance sheet to drive earnings accretive; and strategically aligned growth initiatives, which we've talked through, will be a very important part of the next 12 to 24 months. In terms of capital management, the share buyback remains in place, and the dividend policy remains unchanged. And finishing on capital expenditure, as Darren said, $10 million for FY '22, excluding the Lasoo Phase 1 investment of $3.5 million. That is on top of an excellent operational footprint. So I would say in conclusion, before moving to Q&A, my thanks to our Board, our CEO, Matt Aitken, for his outstanding leadership once again over the last year; our CFO, Darren Dunkley, for his ongoing invaluable contribution to the business; and the entire IVE team of 1,600 for their skill and continued commitment over what has been a most challenging year. Thank you again for making the time to dial in for the call. If there are any questions further to today's call, we will respond within 24 hours. And please feel free to make contact with any additional questions or areas you would like to discuss further, and we look forward to providing you further update to shareholders at our AGM in November. Thank you. On behalf of all of us here this morning. Thank you.

Okay. Thanks, Geoff. We're now opening up for Q&A, as Geoff mentioned. Some questions have been sent in ahead of time, but there is also the chat function on the webinar, which is accessible from the bottom right-hand side of the screen. Perhaps, Richard, I'll hand over to you to start with some of the questions that have been submitted ahead of time.

Thanks very much, Clive. And so -- we've got a couple of questions that have come in through on the Q&A panel. So I'll take -- the first one is, lots of well-known household names have come on as customers in the last 12 months, such as Woolworths, Westpac or IAG. What services are you providing for them?

So it's Matt here. I'm going to take that question. So just to give you an example across 2 of those brands raised, Woolworths, we provide a lot of data in one-to-one communication services for them in relation to their Everyday Rewards loyalty program. We provide a significant amount of product in relation to point-of-sale, retail display throughout their supermarkets nationwide. We provide uniforms for Woolworths, and we also distribute all of their letterbox catalogs nationwide. For Westpac, we provide creative services. We have -- in pre-COVID times, a significant number of our staff embedded in Westpac facilities across Sydney, Melbourne and Adelaide. We service all of their 5 brands. So when you think about Westpac, it's also St.George, Bank of South Australia, Bank of Melbourne and BT, RAMS and so forth. We provide a lot of work for them around their data-driven communications requirements, both physical and digital. So really the transformation of their customer engagement strategy into a more digital world, digital environment. So a lot of consulting and work in and around their sales force marketing cloud platforms with them. We provide premiums and merchandising. We warehouse all of the product that's required to support their branch networks around the country and their merchant networks. So a lot of logistics and a lot of product sourcing. So -- and that would be consistent across many of our other customers like IAG and others. So hopefully, that gives you a flavor for the types of products and services and -- that we're supplying these companies.

Thanks, Matt. Okay. The next question...

And Richard, we've got a question from Hamish Murray.

Sorry, guys, I couldn't work out the chat function, so I just raised my hand. But maybe just -- and I know we touched on this earlier, but could we just touch on, I guess, the current trading conditions that you're seeing as we enter into this first half '22. And maybe how any of your customers are approaching this differently to the last lockdowns we saw, I guess, given the vaccines and there's less uncertainty about how this plays out than there was at the peak, I guess, this time last year?

I think that's probably the answer. There is less uncertainty and less volatility and less fear in the Australian economy and across the country than there was, notwithstanding this Delta outbreak and the current lockdowns than there was a year ago. And the vaccine targets are now well on track to be met. So I think despite where we sit right now in terms of people feeling and looking at daily case numbers that there is a clear view that the end is in sight in terms of lockdown and to that extent in the low interest rate environment and still with reasonable levels of household liquidity that the strong economy will -- that the economy will bounce back post the pandemic. And I think our customer base is a rock-solid customer base. They will be and have the capacity to spend to drive consumer sales, and we have every expectation that they do that. We might even see a little more this year than last year because there were a lot of people that -- consumers that bought stuff last year that won't be looking necessarily to buy the same thing this year. So that may actually result in retailers driving hard to maintain or match their revenue or sales numbers from last year. So we're seeing, as I said, Hamish, pockets that impact in relation to revenue. But equally, we've secured some good new business wins through the back half of FY '21, which certainly put us in good position relative to any short-term revenue impacts as we approach the ending of lockdown in the final rollout of the vaccine.

And I've got a couple. So just the other one was just going to be quickly on that new business wins, and you guys highlighted that momentum has continued going into this half as well, which is good to hear. But how do we think about those $58 million of new incremental wins? Because I know there are a lot of moving parts in the business. But is the sense that once we get normalized earnings, this should give you guys a normalized base higher than what we entered COVID in? How do we think about that?

Well, look, if revenue were to come back, yes would be the answer. But you'll remember in August last year, Coles made a decision to cease the production of their letterbox version of their catalog, which was not an insignificant revenue spend. So we can't ignore that was the case. But equally, if revenues returned to pre-COVID levels in addition to the revenue that Matt outlined previously, and you combine that with the lower cost base -- or the recalibrated cost base that the business is operating in and the work that we've done internally in terms of bringing businesses together and so on that we outlined at the full year last year, I think that goes well for both revenue and for EBITDA. That's before you -- or net profit, that's before you overlay the incremental earnings from strategically investing or investing largely the $30 million to $40 million that we referred to before. And we put ourselves in a position to do that, have the capacity to do that because of the long-term strategy that we've outlined before and the cash that we generate. So does that give you a little bit more color on that, Hamish?

Yes, it does. It does. And then the other one, just on the other side of this coin is inventories came off, reduced just slightly and your net debt is way down under your target. Just understanding, I guess, the paper costs and freight costs. My understanding is that U.S. is up, but Europe paper prices are okay. But just how are you guys managing that freight that we're hearing about and inflation.

Yes. So Hamish, it's Matt here. And it definitely is something that the team is working hard on every day. We've got really strong relationships with our mill partners throughout Europe and America. And we do source still quite a lot of product out of the Australian market, particularly out of the Tasmanian mills. So they're not as -- the product, I guess, and the paper coming out of that mill is not as heavily subjected to the shipping delays or the increased shipping costs that we're seeing coming from overseas currently. But definitely, it's sort of navigating our way through it reasonably well at the moment.

Yes. And just one more for me. I guess, the $30 million to $40 million capital you have to deploy, I guess, no doubt you're surveying the market for acquisitions. Are multiples looking more compressed given the environment out there? And does it look like good hunting environment? And maybe just talk us through the strategic rationale and -- behind the fiber-based packaging and 3PL and what that could mean.