IVE Group Limited (IGL) Earnings Call Transcript & Summary

All right. Just the clock has turned over to 11, so good morning, everybody. My name is Matt Wilson. I will be your host for today's first half results presentation for the IVE Group. A recording of this presentation will be available on the company's website in a couple of days if you happen to miss anything. Presenting today will be the Executive Chairman of the IVE Group, Mr. Geoff Selig; the Chief Executive Officer, Mr. Matt Aitken; and the Chief Financial Officer, Mr. Darren Dunkley. We'll be taking written questions today. So if you would like to ask a question of the management team, please type your question into the Q&A dialogue box. You'll see it in the bottom right-hand corner of your screen. And please don't forget to put your name and the name of your company with your question. At the end of today's presentation, the Head of Investor Relations for the IVE Group, Mr. Richard Nelson will read out the questions, and the team will respond. So with that, I would like to introduce to you the Chairman of the group, Mr. Geoff Selig. Welcome, Geoff.

Thank you, and good morning. Welcome to our FY '22 H1 results presentation. In terms of the contents of the presentation this morning, we've got clearly our first half results, some important business updates in addition to what we provided at the AGM back in November. We'd like to expand, given the last 2 years has been COVID impacted and there's been a lot of talk around the impacts of COVID on the business, the company has continued to perform very well under the circumstances. So we felt it was important and timely for existing and potential shareholders to [Technical Difficulty] on a track record since listing just on 6 years ago. We'll then move on to the outlook and guidance and then Q&A at the end as we just foreshadow. Turning to the dashboard, just to point out, before we go through the dashboard that the numbers are underlying results on a continuing operations basis and any comparisons to PCP exclude JobKeeper receipts that were received in H1 FY '21. As the heading says, a significant uplift in EPS over the prior corresponding period as a result of solid revenue growth, which we'll touch on later, stable margins and the leverage of a recalibrated cost base over the last couple of years. 12.2% increase in revenue, 24.7% increase in EBITDA, 99% increase in NPAT. Gross profit margin once again remaining stable, slightly up. Operating cash conversion to EBITDA of 78%. Net debt, which we'll touch on later at $78.7 million, with still $51.6 million cash on hand and earnings per share up 104% on PCP at $0.146. As a result of the financial performance for the first half, we are declaring today an interim dividend of $0.085 per share fully franked. I'll now hand over to our CEO, Matt Aitken to walk us through the financials.

Thank you, everyone. Thank you, Geoff. I'm going to cover the next 2 pages, Pages 5 and 6 in the investor presentation. Revenue of $382.6 million is almost $42 million, up on PCP of $340.8 million and that includes Active Display Group and AFI Branding acquisition revenues of $8.2 million. Revenue has increased over PCP across all parts of the business with our top 20 clients increasing 12% over PCP. We have seen price moving back onshore from Asia due to supply chain issues and this has been most evident in the retail display part of our business. And whilst the number of retailers reduced their catalogues volumes due to a lack of predictability in their own product supply chain, we also saw a large number of retailers like Kmart and Target returning to the catalogues of our Letterbox channel. Client retention remains high with no material client loss whilst the travel, tourism and exhibition sectors remain at similar levels to PCP, we're now seeing signs of those rebounding as we would expect. Pleasingly, the majority of the revenue uplift related to our continued focus on cross-selling and market share growth, and by way of a few examples during H1, we extended our scope of services through securing Westpac's premiums and merchandising contract and expanded our contracts with Big W, Woolworths, Metcash and Priceline all in the area of retail display. In the letterbox and distribution part of our business, revenue was up 17% over PCP as a result of significant new business wins during May to July last year. Principally, these were Officeworks, Bunnings and Aldi and to a lesser extent the closure of a competitor distribution network in Australia in early H1. As mentioned, new business momentum across all parts of the group has been strong for H1 as we enter H2 and I'm pleased to announce we are in the final stages of contract execution for 2 new contracts, each with annual revenues of circa $10 million per annum. Turning to Page 6. Gross profit margin of 47.5% was stable to PCP of 47.3%, which reflects a strong revenue growth over PCP, stable market conditions, not withstanding the current supply chain challenges and tight management of our COGS. NPAT, as Geoff said, of $20.9 million was a 99% increase over PCP of $10.5 million, EPS of $0.146 per share it was a 104% improvement over PCP of $0.072 per share and EPS growth was driven by the uplift in revenue, stable margins, lower finance costs and the benefits of the cost base recalibration that occurred 12 to 18 months ago. Depreciation and amortization of $21.4 million to PCP of $24.2 million. Net finance costs of $3.7 million were lower PCP of $5 million. And we had $3.4 million of nonoperating items excluded from the underlying earnings, largely related to business [Technical Difficulty] the employee shares issued to all employees, as we mentioned at the release of our full year results in August last year and Software-as-a-Service costs relating to IT platforms not be deployed. I'll now ask Darren to step through Pages 7 and 8 of the presentation.

Thank you, Matt, and good morning, everyone. I'll now continue to take you through the financial section of the presentation, starting at Page 7 with the net debt. Continued balance sheet strength is a result of our strong cash generation, maintaining low gearing levels, enhancing our flexibility and capacity to pursue a range of earnings accretive initiatives. Net debt of $78.7 million is flat from [Technical Difficulty] compared to $90.1 million on PCP, a good result given seasonal working capital increase as well as cash funding of the acquisitions of ADG and AFI. Our cash in hand of $51.6 million is after the group repaid $50 million of senior facility in the period. Canceling $35 million of the facility with the remaining $50 million of the facility undrawn. The group's $30 million working capital facility also remains undrawn. In total, the group has $45 million of undrawn facilities available. The paydown of senior debt will continue to reflect in reduced finance costs in our NPAT earnings. Again, our balance sheet strength is cornerstone of capacity to execute on growth initiatives for the remainder of FY '22 and beyond. Capital expenditure, our operational asset base has been in excellent condition and continues to result in lower capital expenditure than previous years on the back of investments of meaningful acquisitions and growth initiatives. First half capital expenditure of $3.5 million, excluding our investment in Lasoo. Full year capital expenditure forecast to be circa $13 million, again, excluding our investment in Lasoo, which is made up as $10 million in group-wide target investment and maintenance, as previously communicated at the time of our FY '21 full year results release, $3 million in growth/acquisition capital expenditure to support the integration of ADG and AFI into our retail display operations in Victoria. This is a good example of us using our balance sheet strength for growth initiatives. To reiterate on previous updates, our ongoing CapEx spend relative to our depreciation expense for base business is expected to be approximately 60% of our depreciation pre-AASB 16. On Page 8, cash generation and interim dividend, operating cash flow conversion of 78%, operating cash flow conversion impacted by the seasonal increase in working capital due to higher activity levels in the period as was foreshadowed at our FY '21 full year results release. Disciplined management of the business, working capital and debt underpins continued strong dividend payment for the period, resulting in a dividend of $0.085 per share [Technical Difficulty] declared. This concludes the financial section of the presentation. I'll now hand you back over to Matt. Thank you.

Thanks, Darren. As we mentioned at the release of our FY '21 full year results in August last year, we've earmarked $30 million to $40 million for investment in growth initiatives, including acquisitions. The acquisition of Active Display Group and AFI Branding Solutions in November last year was the first use of these funds as part of executing on our strategy and pursuing a range of growth initiatives we have on the radar. The integration of both ADG and AFI continue to progress very well and is anticipated to be complete by the end of June this year, at which point all 4 ADG operations in Victoria will have been fully integrated into our facilities at Braeside Victoria. Post integration, we remain confident in achieving $45 million of annualized revenue, $6.5 million of EBITDA and NPAT of $4 million. And all the key customers and staff have successfully transitioned to IVE with our sales teams already cross-selling IVE's broader offer to ADG and AFI clients and likewise, to IVE clients for new products and services that we have acquired. On Page 11, in relation to supply chain, the global supply chain disruption for both raw materials and finished goods is requiring ongoing cost management by the IVE team. Notwithstanding, we remain well placed to navigate the current dynamics, which we expect to continue for the foreseeable future. As I mentioned earlier, we've been the beneficiary of clients needing revenue back onshore, and this has been particularly noticeable in the retail display space. The dollar supply chain challenges are primarily affecting the supply of paper, where we maintain strong relationships with our global and domestic partners. We still intend to keep a focus on building our inventory levels as we previously foreshadowed in 2021. Longer-term impacts of any upward price movements have been factored in to contract terms and renewals, and we continue to work closely with our clients to manage and mitigate [Technical Difficulty] potential impacts. Turning to Page 12 and Lasoo. Over the last 12 months, we have committed to investing in the enhancement and amplification of Lasoo, which is Australia's leading digital catalog and [Technical Difficulty] with a very loyal and stable consumer following. We intend to continue that investment over the next 2 years as we improve the consumer experience and work closely with our retail clients to unlock opportunities to drive further revenue for their business. Phase 1 investment of $3.5 million to re-platform refresh the brand and an updated user experience both on an app and browser level are progressing according to plan. New platform is now in the final stages of development and on track for renewals in the coming 6 months, at which point, we look forward to sharing more detail with you. I'll now ask Geoff to take you through the next section of the investor presentation commencing on Page 13.

Thanks, Matt. Look, as I said, upfront before we walk through the outlook and the guidance we wanted to spend some time reflecting or recapping on our track record of strategy, execution and capital management since we listed just over 6 years ago, we thought that was timely important given the disruption of the last 2 years and the focus on COVID through which the company has continued to perform strongly, as I mentioned earlier. From our perspective, a clearly defined and well-executed strategy has cemented IVE as the largest integrated marketing communications business in Australia over the last 6 years. And as a result, we hold leading market positions across all sectors in which we operate. From the investment and expansion perspective, we have invested to expand and diversify our offer, and that has resulted in the compelling value proposition we take to market. Our strong free cash flows, access to capital. We've done 2 capital raising since we listed. All of this has enabled the company to execute long-term [Technical Difficulty] transformational investment program that has really essentially double the size of our business since we listed. Our market-leading positions across the marketing communications sector as a result, we have a stable and diverse client base. They are a Tier 1 client base. A revenue mix across the range sectors, which we push for are very stable margins over many years, very reliable cash flows and a strong balance sheet, which we've touched on previously and will again shortly. If you look at the top of Page 14 and the operating and free cash flow diagram, this is a simple, but powerful way for us to demonstrate the cash generation of our business. Essentially, from FY '17 to FY '21, we have diluted free cash flow of $279 million. an average of 105% operating cash conversion to pre-AASB 16 EBITDA. And that is in the context of the period FY '17 to '19 of significant CapEx to support revenue and expansion initiatives. As you know, CapEx has now returned to more normal of levels. Ultimately, the outcome of strong cash generation is dividends. And to restate the company's dividend policy, it is 65% to 75% of NPAT that's what we target for the full year payout ratio. Since we have listed, we paid $104.3 million in fully-franked dividends, including the interim dividend we've declared today. And that averages at a 7.6% yield, excluding the franking credit benefit. And this is in the top quartile of all ASX-listed companies. That also excludes FY '20 where to be prudent, no dividend was paid as a result of the COVID-19 pandemic. We also successfully completed the share buyback last year, which was good timing and a good outcome, having spent $7.4 million to buy 3.6% of the issued capital to be of the company back at what was an average price at the time of $1.37 relative to close yesterday at $1.92. So we feel at this stage, we have no plans to initiate further buyback and feel it's more important for us to focus on our strategic priorities to pursue further earnings-accretive growth opportunities as outlined previously and once again before we move on to the outlook. So in terms [Technical Difficulty] opportunity. The first one would be more of what we've done previously, and that is to grow our revenues organically through investment and cross-sells and growing market position and leveraging off our integrated offer our world-class operations, our market position and our competitive advantage. The strength of our balance sheet, as Darren touched on puts us in a very good position post-COVID to invest across a range of strategic organic initiatives together with opportunities that may present in terms of attractive acquisitions. At all times, we will maintain a strong balance sheet. You'll see from our numbers that based on our FY '22 full year earnings guidance, we expect net debt at 30 June to be circa 1x, pre-AASB 16 EBITDA, that is well below our stated leverage target of 1.5x pre AASB 16 EBITDA. And as we've said a number of times before, we have allocated $30 million to $40 million to invest in a range of these types of opportunities. Certainly, Matt's reference to ADG and AFI before is a good example of that. We intend to drive to grow our fiber-based packaging offer, and this would be certainly expedited if we can find an appropriate acquisition in this space. We'd also expect a number of bolt-on acquisition opportunities will present over the coming 24 months. The company has a demonstrable track record over the many years of successfully acquiring and integrating businesses to further strengthen our own business and to also unlock synergies from an earnings perspective. And then finally, an important growth opportunity for us that Matt spoke to previously, and we'll say more about over the coming 3 to 6 months is our investment in the application and enhancement of the Lasoo platform. So I will now hand back to Matt to walk us through the last part of the formal presentation, which is the outlook and guidance on Page 17.

[Technical Difficulty] I mentioned to the outstanding on Page 17, as Geoff said, a solid H1 result and continued momentum across the business places us in a strong position to deliver a healthy full year result that will be well up on FY '21. As illustrated by the strength of our H1 earnings, heightened operating leverage across the business units has contributed to a significant uplift over our H1 FY '21 performance as existing client revenue rebounds and recently secured new business phases in. Revenue momentum is strong, and we remain optimistic this will continue over the remainder of FY '22. And from an FY '22's perspective, we expect to deliver underlying EBITDA of between $98 million and $101 million. Underlying NPAT is expected to be $33 million to $35 million, which is a 67% to 77% increase over PCP. And H2 NPAT will be impacted by $3 million as a result of one-off contractual timing differences of recent paper price increases and we'll continue to monitor closely and manage our paper supply chain prices, which we expect to continue right through the remainder of 2022. Restructuring and acquisition costs are expected to be approximately $4 million, and capital expenditure is expected to be $13 million [Technical Difficulty] excluding the Lasoo investment of $3.5 million, with net debt at 30 June 2022 expected to be circa $85 million. The business still has a range of initiatives that it is executing on. These are to complete the Victorian business relocations and Braeside Victoria site consolidation, and that will occur by the June '22, to successfully complete the integration of ADG and AFI into the broader IVE business again to complete by the end of June. The final stage development go-to-market launches like the phase 1 enhanced Lasoo platform that I spoke to earlier again timing for the end of the current financial year towards the end of June, and to finalize our strategy and plan to build a fiber-based packaging capability within the broader IVE Group. Before handing back to Geoff, I'd just like to acknowledge the contribution of all of our staff during H1 [Technical Difficulty] our leadership team and the ongoing support of the Board. Thank you very much. And back to you, Geoff.

Thanks, Matt. That ends the formal part of the presentation as I've alluded this morning. So now happy to move to Q&A.

Okay. Thank you very much gentlemen, and at this point, I'd just like to remind the people that if they would like to ask a question in the bottom right-hand corner of your screen, you'll see a Q&A dialogue box. Please click on that. And write your questions there. And please don't forget to put your name and company. And I'd now like to call on Richard Nelson, the Head of Investor Relations, and who will go through some of those questions. Richard, over to you.

Thanks, Matt. And at this stage, we do have a question. In regards inflation, where it is since being rising and threatening to the company entrenched. Is this changing the way you think about your debt and leverage going forward?

Yes, and I wouldn't necessarily link a reference to inflation to our view necessarily on gearing or net debt. I think the important thing for us as a board and as a team is to -- as I just said before, would be to ensure that we maintain the strong balance sheet that we have and that we look to deploy the capital we have put aside wisely [Technical Difficulty] ADG and AFI acquisitions for $6.5 million total acquisition price, including the deferred component to deliver a $6.5 million EBITDA number and $4 million NPAT number. That's a really good example of us using our money wisely and acquiring a business in this instance rather than an organic investment on a very low multiple. So I think we keep a close eye on inflation and managing costs as we always do in our business. And the Board and the team are acutely aware of the importance of us maintaining the strong balance sheet because that benefits the business and key stakeholders of the business in many, many ways.

Thanks, Geoff. Okay. We had a question from one of the analysts, Hamish, if you wouldn't mind un-muting and you can ask your question.

Apologies, guys. I don't think I could use the interface for some reason, it might be [indiscernible].

We can hear you.

Yes, typing. No, I was just going to ask a couple. The first thing the travel and tourism both events, merchandise for events, you mentioned that, that really hasn't moved in the half, but has only started to respond now. I recall it was about 2% of FY '21 revenue. Is that about where it is? And where can that go if it returns to pre-COVID levels, do you guys have an idea or better, a range as a percent of revenue?

No Hamish, it's Matt. So we've definitely seen good momentum coming back into it at the moment. So one of the things [Technical Difficulty] tourism and that exhibition and events space is the acquisition of ADG and AFI consists of significant additional capability in events. That could account for quite a significant uplift in [ ADG and AFI ] business. They have historically been very, very strong in that space. And we have seen really strong interest coming back there. But no, we would expect the travel and tourism being to continue to rebound strong and back to historic levels, if not greater for a near period of time as that part of the sector and industry ranks back up.

And is there any broad [Technical Difficulty] where that was pre COVID. Obviously, it's getting -- it will be larger given the acquisitions, but just about underlying, I guess, [indiscernible]?

Look, I think in the last spread, we put dollars and cost sectors, travel and tourism was about 3% of $680 million. So we're talking roughly $20 million total revenue for travel and tourism. So I think it's a fair expectation that, that would all come back. And look at [Technical Difficulty], the borders are open again and -- but we're not talking tens of millions of dollars, but still it would be a nice uplift that's not been there in our first half results.

And just got 2 more. Just one about those 2 high-profile clients I think it's one, great work on that. It looks like it's $20 million or thereabouts in annual revenue. Can you disclose the timing of that and how much of that is baked into this really strong guidance you guys have? Or how much would flow through, I guess, to the next year in FY '23?

The majority of it is -- so one of them has commenced transacting already Hamish, and then one won't commence until quite late in the current financial year. The one that is commenced trading already isn't really in the current financial year is going to make a huge difference to the uplift in the outlook statement or result. So it's probably addressing known black hole new business budgets and cuts that we already had. So the majority of the benefit will come from the more in the FY '23 than FY '22.

And just one more from me. You guys like this excess capital you have in your balance sheet and willingness to do acquisitions. Are you still looking at the 3PL space or are there different areas that, given, I guess, the impacts that may have happened to your competitors and you guys do haven't lost some pretty attractive acquisitions lately? Just can you give us any color around what's around and how you think about it?

Certainly, from a 3PL perspective, and I'll let maybe Geoff talk to sort of what else might be around, Hamish, from a 3PL perspective, part of acquiring the Active Display Group business had quite a substantial 3PL capability inside of as well. It was a business that was previously known as [ Marketforce ] the WPP owned as well and they folded that into the ADG brand. So part of that integration, if you like, is the relocation and the integration of the best part of [indiscernible] with some 3PLs customer stock into our existing logistics facilities. So that has seen good growth in that space already. So it's really the ADG and AFI acquisitions multipronged in terms of the parts of our business and the parts of our strategy that it is serving to. I think that in addition to that, the Board has just signed off on an additional shed in Western Sydney, both to support the growth of our existing logistics business, which has been very strong over the last couple of years, and also with a view to pushing hard to grow the 3PL revenues as well.

And continuing that theme with the next question is, do you expect further investment in inventory for the second half [Technical Difficulty] supply chain issues? And also, do you expect any further supply chain impact due to what's going on in Europe?

So I think the answer to the question is yes, we do expect to continue to grow our inventory levels, the average order time and delivery time out of Europe now for raw materials for principally paper is circa 7 to 8 months. So if it's not already on the water then it's not going to impact our H2 inventory levels. However, we procure raw materials of paper specifically across all parts of the globe, including domestically here out of Australia, out of Asia, out of North America. So we're not completely reliant on Europe for buying needs. We do intend across the core operating parts of our business in that front space to grow in retrievals.

And just a clarification question. Is the impact from paper prices. Is that in the guidance?

Yes, it is, yes it is, so the $3 million of impact that we have called out in the outlook statement that's already been taken into account in the guidance number.

Okay. And just on [Technical Difficulty] your ability to pass on rising prices?

All of our contracts have clauses in them that enable us to pass increases on. Some of those may have timing differences in them as we're currently seeing, and it's one of the reasons we're calling out a $3 million NPAT impact for H2. But all of our contracts have the ability for us to pass on paper increases be that immediately or [Technical Difficulty] come stages through that contractual period.

Okay. Shifting issues just a little bit. What are the major competitive threats to each of your main businesses and perhaps bringing in another question, which is just about phasing up any changing more broadly in the medium term?

Well, I think as we said previously, we don't have 1 headline competitor because of the diversity of our offer. We deal with competitors at different levels, albeit we have far less competitors now than what we had 5 years ago and 10 years ago, that's the first one for me. We also hold very, very strong market positions in the respective parts of the sectors, the subsectors in which we operate. And that puts us in a really unique position from which to compete. If you look at the fundamentals of the business, our people our asset base, operational footprint, our buying power, our level of efficiency on all of those fundamental it puts us a very, very strong competitive position right across the various businesses that we have as we look to compete and grow market share as we emerge from COVID.

The next question is, are you seeing problems with retaining and/or acquiring staff?

I wouldn't -- it's Matt here, I wouldn't necessarily say we've seen problems that it's definitely a more challenging environment to attract staff because clearly, there's a lot of opportunity out there at the moment for employees. So we would expect to see that change as the borders open up and we have more migration into Australia, but we definitely see yes some challenges in certain roles, particularly in our tech roles. We've seen high demand for tech roles in Australia over the last 6 months.

And one other one on the acquired businesses, can you comment on the current run rate of those businesses into the second half of the year?

The revenue for H2 for the acquired businesses is circa $13 million from [Technical Difficulty]. It's minimal today as we move through H2, they will get up on to about $45 million per annum run rate by the time we hit the start of July, particularly as we see the events and exhibitions sector continue to come back and improve the opportunities for the AFI Branding product business.

At the moment, I'm not seeing any other questions, Matt. So I'll hand back to you.

Thank you very much, Richard. All right. Well look, I might just say, so Geoff, if you have -- might have some closing comments.

Not necessarily. I can talk too much at times. I think our results illustrate what we said over the last 12 months, notwithstanding COVID that as revenue returns to the business, which it has done, both existing customers rebounding and new business phasing in and some acquisition revenue there from AFI and ADG, we said very clearly that as revenue comes back to the business that the recalibrated cost base and leveraging that recalibrated cost base would drop to the bottom line. And I think the H1 results that we've just been through demonstrates that very clearly. And if you overlay that with our cash position, our net debt position, our balance sheet capacity, so to speak, and our market position, I think it puts the company in a very, very strong position to pursue a range of further opportunities to continue growing and diversifying the business over the [Technical Difficulty].

My apologies Geoff, and using a platform with a lot of different things coming in. I did actually miss one, so apologies for that. The question was relating to the does the company see the changing over the next 5 years, in particular, with reference to the evolving digital environment?

Yes. Look, it's a question that -- it's Geoff here. It's a question that we've dealt with previously and that we talked about previously. For us, our business is not about 1 channel. Our business is about an integrated offering and communicating customers or clients communicating with their customers across multiple channels, and that means traditional channels like print and the range of digital channels. And we play quite heavily in both spaces, the digital and the more traditional or the physical and more [ tactile ] or whatever you wish to call it. And ultimately, that's the power of the offer we take to market. And that is ultimately the way most of our clients communicate. If you look at a lot of the large retailers, for example, they have a strong digital footprint, but they're also in 7.5 million letterboxes every week. They work hand in hand, and there's a lot of other examples we deploy to in customers across the group. That would fall into exactly the same category. So it is a combination. And through making the [Technical Difficulty] many years ago and continuing to evolve and invest we're in a strong position to be across multiple channels, which ultimately is the answer to that question.

Yes. It's Matt. Yes, I would add to what Jeff said that I think with recent trends and with recent movements well in the industry [Technical Difficulty] a data-driven communications business is one of those really good examples where we are one of the largest sales force partners in Australia. We're a very large daily marketing technology partner as well. We are navigating all big 4 banks through their customer comps strategies in terms of how they work directly [Technical Difficulty] make directly to their customers, no matter that channel. In the professional services component of our data-driven communications business now the revenue there is up to $25 million to $30 million per annum in professional services and consulting revenues. So I think it illustrates that right across different parts of our business, we are embracing those digital channels, and we run at the forefront and where our clients want us to be in terms of being a relevant marketing partner in this [indiscernible].

Okay. One last check and there are no more questions now. Thanks, Matt.

Terrific. Thank you very much, Richard. Well, that will conclude today's presentation. I'd like to thank Geoff and his team for the presentation today and an outstanding result. As I mentioned earlier, there will be a recording of this presentation available on the company website in the coming days. So without further ado, I'd like to call the meeting to close. And many thanks for all of your attendance.

Thank you all.

Thank you.

Thank you everyone.