IVE Group Limited (IGL) Earnings Call Transcript & Summary

Well, good morning, everybody. Thanks for your time this morning. I'm joined for today's presentation by our group CEO, Matt Aitken; and CFO, Darren Dunkley. And we will be working our way this morning through the FY '22 results presentation as uploaded to the ASX this morning. It's fair to say that the beginning of FY '22, there was a lot of volatility and uncertainty around, particularly across supply chains, including our own. And these followed 2 years that were heavily impacted by COVID, albeit the company demonstrated through FY '20 and FY '21, its resilience and continued to deliver strong results. So we're certainly pleased today to present our FY '22 full year performance and further, at the end of the presentation, provide guidance for the FY '23 full year. We'll be following the contents on Page 2 of the presentation. And I might just refer in the first instance before handing over to Matt, the dashboard on Page 3. Suffice to say across all of the metrics, a strong uplift over the PCP and a nice bounce back in revenues, which Matt will touch on a little later. So revenue up 15.6%, EBITDA up 13.3%. Net profit after tax up 66.1%. A slight reduction in our gross margin, which we'll touch on. Net debt at $76.8 million is significantly lower than what was foreshadowed in June as a result of strong collections, better collections in the month of June, which we'll also touch on, and that ultimately resulted in a 71.1% increase in earnings per share. And today, we are declaring an $0.08 final dividend. And Matt will touch on the full year dividend shortly. So at this point, good morning again, and I'll hand over to our CEO, Matt.

Thanks, Geoff, and good morning, everyone. As Geoff has mentioned, the business delivered a very strong operating performance during FY '22, resulting in a meaningful shareholder returns. Guidance has been met and strong cash flows have delivered increased balance sheet strength, all of which illustrates the underlying resilience of our business. In addition to the metrics Geoff covered on this previous page, I'd add that the increase in revenue of $102 million versus PCP has been largely driven by strong new business and organic growth initiatives despite some COVID-impacted sectors like travel, events and exhibitions not rebounding to expected levels. The final dividend of $0.18 per share tax the full year dividend to $0.165 per share fully franked and we've improved our ROFE from 14% to 21%. Moving on to the strategic initiatives on Page 4 and 5 of the presentation deck. During the year, we executed on 2 key strategic initiatives, the first being the Active Display Group and AFI Branding Solutions acquisition and integration. The acquisition of ADG and AFI completed in November for consideration of $6.3 million. $4.6 million of the consideration was paid on completion, with the remaining $1.6 million payable as deferred consideration over a 24-month period. Post the full integration of both ADG and AFI in to IVE's existing operations, the acquisitions are expected to contribute annual revenues of $45 million, additional EBITDA of $6.5 million and NPAT of $4 million, and we expect that integration to complete by Q1 FY '23. These acquisitions have significantly expanded our third-party logistics and retail display businesses as well as further diversifying our offering into events and exhibitions. To date, it's been very well received by all staffing customers. And the second key strategic initiatives centering around our Victorian footprint where over the last 2 years, we've invested significantly in the site consolidation program. This will result in IVE operating from 2 precincts in Melbourne driving further efficiencies and enhanced client experience. Our Sunshine facility totaling 52,000 square meters across 3 co-located buildings in the west of Melbourne is the base for our Victorian web offset printing operations, a Letterbox distribution hub. The new Braeside precinct in the southeast of Melbourne, also totaling 52,000 square meters across 4 co-located buildings, is the base of our other Victorian operations spanning commercial printing, data-driven communications, retail display and fulfillment and logistics. And both the ADG and AFI businesses are being integrated into the Braeside precinct. In relation to the global supply chain disruption, we touched on this in the half year results presentation. Both raw materials and finished goods have been impacted required cost and focus and attention throughout the year. Our strategic decision to increase inventory holdings continues to place us in a strong competitive position to respond to client demands. And during the year, we benefited from clients making revenue onshore from Asia, particularly across the retail display sector, and we see more of this trend continuing as we head into FY '23. The company remains well placed to manage this dynamic, which is expected to continue for the foreseeable future, albeit we have seen an improvement in supply chain stability in recent months. In terms of our balance sheet being strengthened, the group's balance sheet has significantly improved and strengthened over the last 2 years on the back of disciplined management of the business and continued strong cash flow. Net debt at 30 June was $76.8 million, down more than $60 million from 2 years prior, and this represents a pre AASB16 net debt position of 1.1x. The strength of our balance sheet continues to place IVE in a very good position to invest in a range of organic initiatives and strategic acquisitions to further broaden and diversify the group's revenue and earnings, and we will discuss this later in the presentation. Darren will cover more detail in relation to the balance sheet in the next section of the presentation. And as such, I'll now hand over to him and ask him to step you through the financial results summary.

Good morning, everybody, and thank you, Matt. If we just turn to Page 8 and 9, I'll take you through the profit and loss. Strong uplift in our underlying revenue, EBITDA and our NPAT revenue increase of $102.5 million, 15.6% percentage increase over PCP. Full year revenue of $759 million compared to $656 million in revenue. $30 million of this revenue increase includes 8 months of revenue from ADG and AFI acquired on the 1st of November 2021. Revenue growth of 11.1% over PCP, excluding ADG and AFI revenues, reflects increased activity over COVID-19-impacted FY '21, continued solid new business momentum and ongoing strong client retention. If we just move to Page 9, gross profit margin of 46.6% compared to 48.1% of PCP. The reduction in gross profit margin under PCP is predominantly -- primarily due to contractual timing differences of passing recent paper price increases as previously foreshadowed. We intend on retaining inventory at current elevated levels to ensure no disruption to client service levels and to place business in a strong position to take advantage of further growth opportunities. We are closely working with our clients to successfully manage low trough price increases as a result of upward pressure in input costs. As you can see by the margin now is it's correct that the company's margins have remained stable over time. EBITDA of $96.6 million compared to $85.3 million of prior year, an increase of $11.4 million totals 13.3% growth. NPAT of $33.1 million to PCP of $19.9 million, an increase of $13.3 million, 66.1% growth. Growth in both EBITDA and NPAT over PCP primarily driven by uplift in revenue, offset in part by the contractual timing differences of passing on recent paper price increases. Earnings per share of $0.231 per share to PCP of $0.135 per share is an increase of 71%. Depreciation and amortization costs of $42 million compared to $47.2 million to PCP on a pre AASB16 basis depreciation, excluding amortization, was $16.9 million and compared to $17.2 million. Net finance costs of $7.1 million to prior year of $9.5 million, again, on a pre AASB16 basis. The finance cost of $3.7 million compares to prior year of $6.3 million, reflecting the benefits of reduced debt levels over the period. Nonoperating items of $8.2 million pretax are excluded from the underlying earnings. These are $4.9 million of relocation of 4 Victorian businesses to our Braeside precinct as well as redundancies as a result of the ADG, AFI acquisitions and subsequent integration. $0.7 million for acquisition costs related to ADG and AFI, $1.2 million for one-off share -- employee share issue, as previously communicated and $1.7 million for software-as-a-service cost per MIS system is still in development stage. We just moved to Page 10. Further strengthened balance sheet provides significant capacity to support growth initiatives. So net debt, as Matt has already touched on, at 30 June of $76.8 million compared to $77.3 million in prior year. Net debt of 1.1x pre AASB. EBITDA is well below our stated target of 1.5x. Net debt was better than the June '22 guidance update due to better-than-expected debt collections in the month of June, a pleasing result given the company's targeted and foreshadowed increase in inventory holdings. The reduction in cash on prior year reflects a $35 million senior debt repaid in August last year increasing working capital, circa $30 million of additional inventory holdings due to the building of inventory levels as previously discussed. At 30 June '22, undrawn facilities were $35 million. As of today, the 25th of August, undrawn facilities was up $55 million following a further $20 million debt repayment in July '22. In May '22, the company successfully renewed its syndicated senior debt facility for a further 4-year term, with maturity date extended to May 2026. The renewal achieved improvements in both terms and pricing and is reflective of our ongoing balance sheet strength, earnings quality and our strong relationship with our syndicate members. Capital expenditure, Page 11. The company's excellent operational footprint is the result of target investment over many years. Full year capital expenditure of $13.9 million, excluding our Lasoo investment. $3.8 million relates to the group's Victorian site consolidation, $3.7 million relates to digital printing fleet upgrade and expansion. Lasoo investment of $4.7 million to provide a greatly enhanced and expanded Lasoo platform, including user and customer experience, measures smaller ongoing capital expenditure for ensuing FY '23. FY '23 capital expenditure expected to be circa $14 million. Cash flow and dividends on a Page 12. Strong operating cash flow, disciplined management of working capital, uplifting dividend and improved return on funds employed. Operating cash flow of $91.7 million with a 95% operating cash conversion. This is the management of working capital, including reduced debtor days over the period and strong collections, offset by an increase in inventory holdings to mitigate the supply chain volatility as we have previously discussed. Dividends, final dividend of $0.08 per share, fully franked, up 14% from $0.07 of prior year. Full year dividend of $0.165 per share, fully franked up 18% from $0.14 of prior year. The company's dividend policy remains unchanged, targeting a full year payout ratio of 65% to 75% of underlying NPAT, return on funds employed of 21%, up from 14% from prior year. I'll now hand back over to Matt.

Thanks, Darren. So just picking up on Page 13 and a discussion of strategic and growth initiatives. As we turn to Page 14, IVE had a clearly defined well-executed strategy that cemented us as the largest integrated marketing communications business in Australia now. And we hold leading market positions across all sectors in which we operate. The execution of our strategy has resulted in a diversified, resilient business supporting a consistently high dividend yield and a strong balance sheet to pursue further growth opportunities. Since IPO, the group has consistently generated strong cash flow. And in the last 5 years, we've generated operating cash flow of $380 million, free cash flow of $290 million and average operating cash conversion to pre AASB16 EBITDA of 100%. The disciplined execution of our strategic investment program over the last 5 years has resulted in a significant increase in both revenue and earnings, albeit FY '20 and FY '21 with COVID-19 impact. And turning to Page 15 and thinking about growth initiatives. We continue to organically grow revenue and earnings on the strength of our integrated offer, world-class operations and market position and competitive advantage. Our strong balance sheet places us in a very good position to invest across a range of organic initiatives together with attractive bolt-on and strategic acquisitions that may present. And in this regard, the company continues to allocate $30 million to $40 million to invest in a range of earnings accretive opportunities as we embark on FY '23. One of the significant organic initiatives that we've been pursuing and continue to is our Lasoo platform and the investment and upgrade in that digital catalog platform. In FY '22, we invested almost $5 million to completely rebuild the Lasoo platform, and I'll have more to say about that in the next section of this presentation. At a packaging level, we've previously communicated company sees opportunity for both organic and acquisition growth in the packaging sector. Our near-term focus is on finalizing the strategy and plans to build our packaging capability over the coming 24 months. And to this end, the company has been working closely with an expert advisory firm in recent months to further develop and refine our strategy to move more aggressively into the packaging sector. We've now completed an in-depth analysis of the packaging market. This work has confirmed that our strategic imperative to grow our packaging offer is sound and for us to continue to actively seek an appropriate acquisition to expedite this strategy. The analysis has also identified other packaging markets, which strongly complement IVE's key strengths with the potential to further build out the breadth and depth of IVE's offering to its diverse customer base, and we'll look to provide a further update on our packaging strategy at the AGM. As we turn to the last 2 sections, so Page 16 and then on to Page 17. Lasoo today, has a significant loyal consumer and retailer base despite limited functionality, over 200,000 active users per month on average, 23% of current users visiting the site daily and 8.6% of sessions resulting in a buy now click to a retailer site, which demonstrates a very high purchase intent from those people going to the Lasoo site. Many of Australia's largest and major retailers are very active on the platform. And we believe when we think about where we're taking the Lasoo platform and what we're going to discuss in the overcoming slides, that gives us a real market advantage in the way that we plan on relaunching Lasoo into the market. The platform has historically positioned as a digital catalog aggregation site that was offered as an adjunct to the printed catalog, which still remains a very effective channel in today's marketing mix. It adds minimal investment functionality marketing, superficial and efficient comparison of specials, no transactional capability resulting in users being redirected to retailers' platforms and generated only modest revenue for IVE. So we were unable to properly commercialize Lasoo given the legacy technology and limited historical functionality. But as you turn to Page 18, and we think about Lasoo tomorrow, a fully integrated e-commerce marketplace for retailers' specials. 18 months ago, we saw a meaningful opportunity given the loyal consumer and retailer base I referred to, to transform Lasoo into a superior platform to drive a greatly enhanced online consumer experience and to deliver a commercial upside to our extensive retail client base and to IVE. In FY '22, the group invested, as I said, just under $5 million and completely rebuilding and market testing the Lasoo platform. This investment provides an opportunity to commercialize and grow our already active user base on the back of game-changing upgrades and functionality, greatly improved product range, pricing visibility, search and comparison engines, consumers' ability to easily discover, compare and purchase specials from multiple retailers on the one platform in a single transaction. For IVE, we will derive revenue from multiple revenues -- multiple sources moving forward, including the existing digital catalog creation revenue stream. But more importantly, new commission revenue streams are fully integrated, e-commerce checkout capability and other new revenue streams, including lead conversion revenue for retailers not yet fully integrated, advertising and product boosting revenue via a scalable self-service retailer portal, data-related revenue commercialization on a subscription basis, and I'll touch on some of these in the illustrative revenue model in a couple of slides time. New platform will go live in mid-September, so only a few weeks away from now. From the Lasoo launch perspective on Page 19, strong retailer support, best-in-class tech stack, great customer experience, user experience in place and a fantastic experienced team. 65 of Australia's leading retailers across a broad range of sectors are already confirmed to launch and 15 additional retailers launch -- will join post-launch due to integration timing. So great validation of the platform, our strategy and where we're taking it, given those commitments made from those retailers on a prelaunch basis. We're targeting further growth in relation -- in retailer participation as the platform traffic increases and marketing drive heightened awareness. And we still have more than 200 IVE retail clients to cross-sell this platform to over the coming months. Significant number of retailers are already fully integrated, and we expect a further 20% of those to be completed in the next few weeks. We built a very experienced team with CEO Rob Draper, and Chief Product Officer, Matthew Paule, leading that with Matthew Paule coming through Domain Group prior to joining IVE. Scaleable best-in-class tech stack that has been built on Amazon Web Services, but integrating with the leading platforms such as Marketplace or in Salesforce and the group is committing $4 million to the go-to-market consumer launch campaign, which starts in September, and on Page 20 of this presentation, you can get an insight into what that launch campaign will look like. I draw your attention to both the radio and digital TVC graphics, which have embedded links that will let you play an example of the television commercial and the radio ads that will go to market later in September when we launched this product. On Slide 21, we provide some illustrative revenue models. These models illustrate that as the business grows and active users increase, we expect the revenue profile to continue to shift away from what is a pretty traditional revenue stream today towards one that is more dominated by commission-based revenue streams that drives off the gross transaction value made on Lasoo, and we will share more with investors over the coming months post launch. As you'll claim from this morning's presentation, these are exciting times for the group. Business as match fit, it has great people, world-class operations, but a very diverse product and service offering, great operating leverage and a strong balance sheet from which to execute ongoing growth initiatives. I'll now hand back to Geoff to briefly touch on Ovato, and then take you through the outlook statement and provide some closing comments. Thanks, Geoff.

Thanks, Matt. Look as we've said previously, our -- across our the $750 million worth of revenue, it's quite a diverse revenue stream, streams operating across multiple sectors. And over the last 10, 15 years, there's been quite a lot of rationalization and consolidation. And structurally, our sector is in much better shape now than it's ever been. One sector we operate in is the web offset printing sector. Our largest competitor in that sector is a business called Ovato. On the 10th of August this year, we've released an announcement to say that we had entered into an implementation deed with the administrators of Ovato following their appointment on July 21. And that announcement said and I restated here on Page 22 that both of the parties agreed to progress in good faith negotiations for the signing of an asset sale agreement pursuant to which I would acquire all or substantially all or a material part or parts thereof of the business or assets of the Ovato and its subsidiary. So we felt it appropriate to restate essentially what was in that ASX announced on the 10th of August. And suffice to say, we continue to work in good faith with the administrators and we'll update the market as appropriate moving forward. If we just move to the last slide, of the presentation, which is outlook and guidance on Page 24. We believe the solid fundamentals of the business, the strength of our balance sheet place IVE in an ideal position to build the growth over FY '23. As illustrated by the strength of our '22 earnings, the heightened operating leverage across the business contributed to a significant uplift over FY '21 as slight revenue rebounded, as Darren said, post COVID-19-impacted FY '21 and that combined with the benefit of new business. We remain optimistic that the revenue momentum the business has as we enter into FY '23 will continue in the near term. Our F '23 guidance is for underlying EBITDA of $105 million, excluding Lasoo as noted below, which I'll refer to; NPAT at $36 million which would be a 9% uplift on FY '22 NPAT. To restate, the company's dividend policy remains unchanged at 65% to 75% of underlying NPAT. And the point to make here is that in the footnote, the $3.3 million expected after-tax loss associated with Lasoo's consumer go-to-market campaign, primarily the go-to-market campaign is excluded from our underlying results. So at this stage, the dividend would be paid on the underlying NPAT number in the second bullet point of $36 million. We expect our restructuring acquisition costs to be significantly lower than FY '22. And as Darren said earlier, CapEx is expected to be around $14 million. We'll continue to be vigilant over the supply chain, but it is encouraging to note as Matt said before that we have seen an improvement in the stability of the supply chain and we take a lot of comfort albeit it's taken that cash to do it. We take a lot of comfort in the fact that we're sitting on much higher inventory levels than we were 6 to 9 months ago. The initiatives for the year are to complete the Victorian business relocations by September, they have been delayed primarily because of weather in Victoria and COVID impacts on labor. This successful launch of Lasoo in mid-September, as Matt has just walked us through, and we look forward, hopefully, at the AGM in November on providing more details around our strategy and plans, around the packaging sector. So at that point, I think we will finish the formal part of the presentation and happy to move into Q&A.

Thanks, Geoff, Matt and Darren. That concludes the presentation. We've got a few minutes to run through some Q&A. So we'll start off first with any questions from analysts. And then post that, we will take questions and please write them on screen.

Okay. We have a question in relation to inventory, which is could you estimate, please, what the amount of inventory currently held is in excess of what a normal cycle would be.

It's about -- the current inventory levels are about 6 to 8 weeks higher than what we would normally have expected them to be or open and above current client commitments, but I feel that that's entirely appropriate heading down into our peak period of Christmas and also still given the volatility of supply chains.

I'll just take a question now from Jonathon Higgins.

A couple from me today. Just firstly, just around the trading update at the start of June, you obviously had a net debt number that you've come in sort of materially ahead. I'm just wondering if you could just provide just a little bit more context just around why that's come out where it is. It's obviously sort of almost spectacular result for the June period. Can you just provide us some idea around that?

Yes, I'll give you an update on that. Jonathan, it's Darren here. In -- when we did our updated guidance to net debt at June, our collections have been a little bit slower up until that point, and we had a fantastic collection month for the month of June that well exceeded what our forecast was. So that was predominantly the main driver in our net debt number.