IVE Group Limited (IGL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the IVE Group FY '24 Financial Results Webinar. My name is Paul Sanger, and I'm your host for today. On the call, we have CEO Matthew Aitken and CFO Darren Dunkley. The format today is a 20 to 30 minute presentation followed by 15 minutes of QandA. [Operator Instructions] Without further ado, I'd like to hand over to CEO Matt Aitken to start the presentation. Matt, are you there?

Yes, I'm here. Thanks, Paul.

I can hear you loud and clear. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining the call this morning. Darren and I are pleased to present IVE Group's FY '24 results, a solid result that meets all key guidance metrics that we've provided throughout the last 12 months. If we turn to Page 3 of the presentation, let's just touch on some of the key highlights. All key profit metrics are up on a strong PCP with solid margin expansion. Our net profit after tax and NPAT margin is higher, but still impact somewhat by increased net finance costs, and we've had a strong uplift in operating cash flow with our gearing below our target of 1.5x pre-AASB 16. At an operational update level, the Ovato integration is complete as we've previously communicated to the market, and we finished that ahead of schedule at the end of calendar 2024, and the full year run rate synergies of that acquisition integration are reflected in our FY '25 outlook and guidance. In relation to sustainability, we're now entering the third year of our ESG strategy and meaningful progress being made on key actions throughout FY '24, and I'll have more to say on that in the latter part of the presentation. And then across a range of growth initiatives in the packaging space, as you know, we acquired the JacPak business at the end of last year in October being the Cornerstone acquisition of our move into the packaging space. We have no change in the expected cost and/or revenue synergies that we announced at that time and the implementation of the organic expansion plans in Sydney is underway. In our creative and content expansion space, we acquired independent creative agency Elastic Group at the end of May this year, and we continue to grow our power offering, and we've secured a number of clients and projects throughout the year and continued live trials with a major international food retailer. We also have a number of significant RFPs in train currently. We remain committed to the ongoing investment in Lasoo, given the proof of concept and better-than-expected performance. And on all of these initiatives, I'll have more to say later on in our presentation. As we turn to Page 4, and we look at the dashboard, you can see the strong performance against PCP across many of the metrics. Revenue of almost $970 million was slightly up on PCP. EBITDA of $127.8 million was 7.5% up on PCP. Net profit after tax of $43 million was 8.4% up on PCP and EPS at an NPAT level of $0.28 was 5.8% up on PCP. Operating cash flow of 114% was 65.7% up on PCP, and net debt was $131 million. Our fully franked final dividend of $0.085 per share takes our full year dividend to $0.18 per share. And I'll now hand over to Darren to speak you through the financial section of the presentation, where he'll cover off some of the above metrics and others in more detail.

Thank you, Matt, and good morning, everybody. I'll just take you through the financial section of the presentation, starting with the profit and loss, Pages 6 and 7. I'll start with the commentary on Page 7. Revenue up 0.3% to $969.9 million. Revenue includes incremental revenue from Ovato, acquired 13th of September of 2022, and JacPak acquired 31st of October 2023. Base revenue down circa 4% relative to a strong PCP ,largely due to softer second half FY '24 economic conditions, which impacted our CX & Data and Commercial Printing businesses. As previously updated in our June 24 ASX release, it should be noted that this principally related to trading for February to April with stronger trading post-April result up to and including the July results. Solid organic revenue growth in brand activations, a 3PL and fulfillment, while catalog and magazine including Ovato acquired revenues were in line with expectations. Material gross profit margin, MGM, which is revenue less material cost of goods sold. MGM improved to 46.7%, up from 45.1% in PCP. The margin improvement reflects commercial initiatives, including some input cost relate as well as exiting lower margin revenue following the closure of our Western Australian operations. Underlying earnings, EBITDA increased 7.5% to $127.8 million, up from $119 million in PCP. Incremental Ovato and JacPak contribution, partly offset by increased energy and group costs, which were largely IT, compliance and ESG related. EBITDA margin, again, expanded and improved to 13.2%, up from 12.3% in PCP. Net finance costs increased due to higher interest rates for the full period over PCP as well as JacPak acquisition funding. Nonoperating items. Nonoperating items of $23 million pretax, refer Appendix A excluded from underlying earnings were made up of $13.1 million of restructuring costs, again, primarily related to the completion of the Ovato integration; $5.8 million Lasoo operating loss or $4 million after-tax loss consistent with guidance; $2 million of acquisition costs primarily relating to JacPak. It is important to note that FY '25 nonoperating items are expected to be $2.5 million. Turning to Page 8. Per previous years, we've included a 30 June 24 updates on customer revenue, diversity and longevity, with main points being: continue to increase our revenue and product service penetration with customers buying 2 or more products and services at 86%, up from previous years of circa 75%; top 20 customer relationship tenure at circa 10 years, which again reflects the strength of our offer to our clients. Turning to Page 9, the balance sheet. Net debt in line with or better than expectation, cash at bank $48.8 million. Net debt modestly increased to $131 million, up from $124.2 million in PCP. This was driven by the JacPak acquisition funding, largely offset by a strong increase in operating cash flow at 1.3x pre-AASB 16 EBITDA or 1x post-AASB 16 EBITDA, net debt is below target level of 1.5x and broadly unchanged from 30 June 23. Given the funding of the JacPak acquisition, a very good outcome. Undrawn debt capacity of $50 million, which excludes the acquisition facility. Capital expenditures, continued investment to ensure market-leading asset base. Capital expenditure was $16 million, with $3.4 million relating to the Ovato integration and $1.4 million relating to Lasoo, which included customer experience enhancements. Investment and maintenance capital expenditure included $2.8 million relating to deposits paid on equipment to facilitate packaging expansionary plans at IVE's Sydney commercial printing facility. Capital expenditure is expected to be around $24.5 million in FY '25, including $11 million relating to packaging capacity build-out, net of disposal proceeds. Turning to Page 10, cash flow and dividends, improved operating cash flow with normalization of working capital, operating cash conversion to EBITDA up to 114% from 65.7% in PCP, primarily due to the normalization of working capital following the Ovato transaction, supported by improved supply chain certainty and reflecting the capacity of the business to generate cash. The Board declared a fully franked dividend of $0.085 in line with PCP, giving rights to a stable FY '24 fully franked dividend of $0.18 per share with FY '24 payout ratio of 65%. I will now hand you over to Matt to take you through the balance of the presentation. Thank you.

Thanks, Darren. Just turning to Packaging on Page 12. As previously announced, we acquired Melbourne-based folding carton producer JacPak in late 2023. This followed an 18-month review of the Australian packaging markets to determine the best approach for IVE's entry into the sector. JacPak contributed revenue of just over $28 million during FY '24, which is broadly in line with the annual revenue expectations we have with that business of around $45 million when we acquired it. There's been no change to the expected synergies. So cost savings of $2.4 million have been locked in and the $15 million of available capacity for organic revenue growth that we called out at the time is there, and we're working our way towards filling that accordingly. The group has been encouraged by a number of new business wins that we've had since taking ownership of JacPak. We have a number of meaningful RFPs in place currently. We intend to service national brands through packaging operations in both Sydney and Melbourne and will be supported by our national 3PL logistics network. In Victoria, that would be JacPak remaining as a stand-alone operation with revenue capacity of $60 million. And in New South Wales, we will be expanding the capability of one of our plants here in Sydney to support an efficient production of folding carton packaging work going forward. The JacPak facility coupled with the Sydney expansion will result in total packaging revenue capacity of around $90 million per annum, and you can see this illustrated in the chart on the bottom right of the page. And as you can also see from Phase 2, there would be an additional investment to get us out to $60 million of further capacity, which would result in the group being able to hit $150 million of revenue in this sector in 5 years' time or over the coming 5 years as we've previously stated. On Page 13, just touching on creative and content. Again, we stated 12 months ago that we were implementing a strategy to diversify and expand our creative and content offering. It's been a core part of our offer for over 20 years. As fragmentation of the media landscape and proliferation and marketing channels has significantly increased the tight volume and frequency of content required for effective omnichannel marketing, we felt it was important that IVE continued to upscale its creative and content business to capture additional market share from our customers and to access new revenue streams, markets and customers. Our initial focus was on talent and capability, expanding the breadth and depth of our service offering across strategy, creative content production and technology. And then to accelerate that expansion, we acquired the Elastic Group at the end of May. Elastic specialize in video content creation and visual communications. They have Sydney and Melbourne operations with 40 staff, all of which have now been integrated into IVE's existing sites in Sydney and Melbourne. They retain a very impressive portfolio of customers across a wide range of sectors, including automotive, pharmaceutical, government, sports, entertainment, food, beverage, finance and property. And we now consider ourselves to have an unrivaled in-house marketing agency capability, providing customers with a streamlined and simplified way of producing ideas and content for every marketing channel. We encourage you when you have time to look at the Elastic Reel, the link at the bottom of the page that we're on currently to get a better feel for what that acquisition brings to IVE's product and service offering moving forward. If you turn to Page 14, this page reflects the multi-phase build-out of our strategy and how the initiatives noted on the prior page to deliver a more diversified offering that better serves the diverse needs of our clients and their needs to [indiscernible] on content. The new skills and capabilities combined with our existing offering enables us to now help brands connect with their consumers across every possible touch point. Moving to Lasoo on Page 15. On June 2024, Lasoo generated an annualized GTV, which is gross transaction value, of $16 million. Its unique monthly active users are up to 335,000 per month, which is 81% up on PCP. We have over 213 retailers live online today, 70% up on PCP and a very healthy pipeline of retailers continuing to integrate as we talk. The average basket size is up 48% on PCP and it's now $229. Given the proof of concept and better-than-expected performance, the group has decided to continue to invest in Lasoo to further enhance customer experience or consumer experience and significantly scale the business. Lasoo is now expected to scale to an annualized GTV of over $150 million and breakeven during FY '28 versus the $50 million GTV and breakeven during FY '26 that we had in the original business case, and we had notified the market that we expect to breakeven to be in FY '26 previously. The decision to delay breakeven is principally due to further commitment in consumer marketing spend to draw from scale. All of the metrics are tracked daily and if at any point we weren't happy with the results, we can reduce and flex spend accordingly. On Page 16, we're providing some further stats and additional information. You can see we now have over 200,000 SKUs live and available on the platform. We have a very, very strong Trust Pilot score of 4.3, and that continues to unscrew the consumer experience. And the top 4 categories being Home & Garden, Furniture, Health and Beauty and Sports and Outdoor are supporting a strong average basket size with the highest value items sold on the platform during the year being $8,000. Whilst the monthly average users continues to grow, it's clear from the graph on the top left that the platform appeals to a broad range of consumers with almost a 50-50 split on male-female and 25- to 44-year-olds, making up 46% of all sales. Just moving on to sustainability and a quick update as to where we're at on that journey. As I mentioned earlier, we're about to embark on the third year of our ESG strategy with meaningful progress made during the last 12 months on building many of the foundations across the business. At 1 January this year, electricity was committed to a renewable project with Iberdrola on a 7-year commitment. This goes a long way to addressing a large part of our Scope 1 and Scope 2 emissions as we look out from here to 2030. There has been strong interest across our client base with regards to IVE's strategy and how we can support the sustainability efforts and strategy of our clients, and we expect this to continue into FY '25 and it's currently a big point of difference to many of our competitors in the discussions that we're having with clients. Our people continue to remain a focus with our diversity, equity and inclusion program, IVE works underway. We're also making good progress against our target having a minimum of 80 mental health first aid offices in the business. We're currently at 62 there. We committed to the Australian packaging covenant earlier in the financial year, which is an important requirement for many of our FMCG clients and our packaging strategy more broadly, and we have commenced preparation of our wrap, our reconciliation action plan with a view that this will be launched in Q3 of the current financial year. As we turn to Page 20, just going through the outlook and guidance for FY '25. Underpinned by the diversity of the business and the expected emergence of the full run rate of the Avado synergies and an incremental contribution from JacPak, the group's FY '25 underlying earnings guidance range is an NPAT of $45 million to $50 million. And that guidance excludes the Lasoo operating loss, which will be similar to what it was for FY '24 and restructure and integration costs of around $2.5 million as Darren outlined earlier. As part of the continuing review of our capital management options, the group's dividend is expected to be held steady at $0.18 per share, reflecting the already substantial dividend payout and yield and to preserve cash to pay down senior debt and/or other capital management options. While diversification typically through acquisition remains a core element of our strategy, there is presently nothing on our radar with senior debt expected to reduce further in FY '25. And with a strong balance sheet and numerous organic growth initiatives in train, the business is well positioned for continued profitable growth. And notwithstanding the macroeconomic headwinds, FY '25 trading has commenced strongly. So it's been pleasing over the last 3 months to see the uptick in trading on that front. And in closing, I'd like to thank our 2,000 staff all of their contributions stood over a very solid FY '24 results that achieved all key guidance measures provided to the market during the year. Thank you for attending our call this morning. We're happy to take questions.

Thanks, Matt. [Operator Instructions] We're going to take some questions from some of the analysts are on today, and maybe we'll start with Jonathan or Jono Higgins from Unified Capital Partners. Jono, if you want to unmute and ask your question, please? [Audio Gap] I'm having trouble with Jono. He's actually typed in his questions. The question from Jonathan, he said, hi, everybody. Great set of results. Strong cash flows from the group and gearing now circa below target. Notably, dividend being flat against expectations on profit growth. He is wondering if you can expand a little here, where is the excess capital going.

Sorry, Paul, can you just repeat the last part of that question?

Yes, absolutely. The last part of the question was, he was just wondering if you can expand a little here, where is excess capital going?

It's Darren here. Paul, so part of the answer to that question is we will continue to pay down our senior debt, but we'll also leave flexibility available in our balance sheet for future opportunities and including capital management initiatives.

Thank you. [Operator Instructions] Cissy Xu from UBS. If you can please unmute and ask your question.

I've just got a couple. The first one, digging into that base revenue momentum a little bit. Can you maybe talk us through the exit run rate across each of the different businesses. So Darren, you've mentioned that momentum has improved since April. Just trying to figure out how we think about revenue growth heading into FY '25?

Yes. So Cissy, just on -- so what we were calling out and we called it out at our June ASX guidance update was that principally FX data business and printing -- commercial printing businesses were a little bit soft. But that was principally between the months of February and April trading months. And post that, they've been stronger and trading across the board has been relatively strong, and again, moving into FY '25. We haven't given the guidance on revenue, but again, it's the guidance there, the revenue supports the NPAT growth from -- the NPAT growth that we've guided there from $45 million to $50 million along with the other initiatives that we've got in trade. Does that answer your question, Matt?

Certainly, Cissy, the business units that we saw the softness in earlier in the year have lifted and that has improved, particularly in the July trading but we saw the lifting back up as we came through May and June. So with a number of other business units, some of which Darren called out here like brand activations and 3PL having very strong FY '24 and continuing to be strong going into FY '25.

And maybe just to add on for web offset, the forward order book. Is there anything that looks at normal, any step-up in cancellations or pressure from customers to drop prices or everything looking fine there?

Yes. Nothing, no step-up in cancellations per se. If anything, to see some inquiries coming in from retailers that have not been in that catalog channel for some years with a view to coming back and there is one that will be back in the coming sort of couple of months when that next campaign runs. So if anything, probably a little bit more of an inquiry in that space than what we've seen, I think, largely due to that retailer and consumer pressure that we're seeing out there more broadly, and we've always talked about the catalog channel being a good sort channel and most tougher retailer at times and often having a bit of an uptick. So at the moment, it's steady and sub.

Perfect. And if I can squeeze one more in on packaging. So the $150 million expansion over 5 years. Can you maybe talk about the progress with new business wins and filling that additional $15 million capacity in JacPak? And what we should be factoring in maybe is that FY '25, '26?

Yes. So we've -- there's probably 2 types of wins in the packaging space that we see more of as we've owned this business over the last 8 months is that the quickest sort of one-off projects and then there's the longer-term contracts and those longer-term contracts tend to have quite long lead time sales cycle. So at the moment, we're talking with some quite large FMCG prospects that probably wouldn't commence revenue until closer to 2026. They will be making a decision in 2024. So again everything from sort of immediate access on opportunities to quite long RFP cycles for more meaningful pieces of work, Cissy. So we have won some new contracts through the last 8 months since we've owned JacPak that will yield more opportunity looking forward, presuming that the initial slabs of work that we've won have been successfully produced and managed for them over the coming 6 months. The pipeline is north of $40 million in terms of opportunities. And again, it's a mixture of more immediate opportunities and then longer-term opportunities as well. So I think realistically, calling out $150 million at 5 years is the right number. And it may not be all done organically over that time, and we were consistent in our messaging around that, but maybe if the right bolt-on acquisition opportunity came along in that space in the years to come, we would consider it. But very much at the moment, when we look at what we're doing in Sydney and addressing the $15 million of revenue opportunity we have in Melbourne, we're doing all of that organically under our own steam and yes, pleased with the progress the business made in the last 8 months and how that's shaping up for FY '25 numbers.

Next question comes from Chris Savage at Bell.

I appreciate on electricity, you've got pretty good line of sight now with the new Iberdrola contract and gas doesn't really shift the needle. But can you give us what your assumptions are around freight and paper costs?

Pretty stable at the moment, Chris. So not expecting any sort of material drops in supply chain costs, but also not expecting it to go the other way as long as currency and other sort of global market factors don't disrupt anything. So the supply chain, both at a price and continuity of supply level is pretty stable right now, and that's how we're thinking about it going into FY '25.

What I mean overall, our MGM, we would expect that to be relatively stable moving forward as well, Chris.

And what visibility or sort of locked in costs that you got for freight and paper?

Paper could be anywhere between 6 and 12 months, Chris, depending on the mill that we're buying from and the grades. We also want to leave enough flexibility and our buying to take opportunity moments when they arise with particular mills overseas who might be looking to ship some stock, and we can get a slightly better price than what we might ordinarily but -- and on freight, 12 months as well.

All right. And just on the NPAT range, it's fairly wide, a bit wider than last year. So could you give us an idea what factors might drive that towards the lower end? And what alternatively might drive it towards the upper end?

Well, I think on the lower end, Chris, is more if we have conditions that impacted our results in H2 this year, the February to April type conditions, although in saying that our start FY '25 has been relatively strong. So that obviously could impact our NPAT on the lower side of guidance. On the -- again, on the upper side of the guidance, if we continue to have really strong trading conditions as we've seen in July and moving forward, then we could potentially -- will be on the upper side, but it's too early for us to call at this particular point. When you look at our margin expansion in FY '24, we expect that to continue to happen at an EBITDA level and also an impact [ level ] that we've now closed the Warwick Farm site and we've got the full integration benefits for the full period in FY '25, and we only had them for half year in FY '24. So we're relatively confident about how we see FY '25 currently.

And just lastly, that uniform tender, you keep mentioning with that major American fast-food chain. That seems to have been going on for close to forever. So is there any sort of time line on that?

I think we're pretty close to the interest of finding out either way. So the trial has largely concluded and they're back in the evaluation stage of where they're going for chosen supplier or suppliers moving forward. So yes, pretty close.

If you won that, would it warrant an announcement?

Probably depending on the term of the contract as to whether that's things material, certainly on an annualized basis. It's a really decent number. So yes, and I think it comes down to again, are they going to appoint multiple suppliers to the category? Or are they just going to go with one single supplier.

Thanks, Chris, for your question. I believe that's all the questions we have from the analysts. So maybe, Matt, I'll hand back to you to answer some of the questions that have come from the floor in the Q&A button below.

Sure. Thank you. We've got a question here in relation to the packaging and CapEx. So you've cited $11 million in CapEx for packaging is that part of the $30 million Phase 1 New South Wales expansion previously stated for JacPak. The answer to that is yes. We've got a couple of questions in and around Lasoo that we might try and knock off together. So one is what are the ambitions for Lasoo? Another question is, why does the profitability of Lasoo keep flowing out? And that's sort of coupled with another one where it's why does the time frame for when Lasoo will become profitable keep flowing out or changing? So maybe if I just talk first of all to Lasoo. The business case for Lasoo had breakeven in FY '26 and GTV of $50 million. And we've communicated previously to the market, that breakeven was FY '26. Given how strong the platform's performance has been through FY '24 bearing in mind that we only launched it not even 2 years ago, so we're still in that sort of first 2 years, given how strong the platform performance and results were through FY '24, we have decided to keep investing in that platform to scale it faster. But scaling faster means clearly deferring the loss or the breakeven date from FY '26 out to FY '28. But by doing that and deferring that breakeven date, we can see a much faster pathway to GTV of $150 million, at which point in time, we think that is a far more meaningful e-commerce marketplace than getting out to $50 million. That's why we've made that decision. The money and the commitment and the investment is all in and around the consumer marketing side. So at any point in time, we're not happy with the results in terms of what we're seeing around the growth there, we can pull that consumer marketing spend back very, very quickly. It's something that's constantly under review. That's currently the strategy that the Board has decided to pursue for Lasoo. In terms of our ambition for that platform and our future ambition. We want to scale it, we want to grow it. But we're also open to all strategic options that might exist with that platform as we go through the journey in the coming sort of 12 to 36 months. There is a comment here in relation to Geoff's passing, which is really nice. So I'll just read that out. I'd like to take the opportunity to remember Geoff Selig. I met him when IVE Group IPO-ed. He was a big driver of the company's growth for many years. Tough but fair minded, Norway. [Audio Gap] Geoff, when I was fund manager, I do wish that management have negotiated this difficult time. Thank you, Jonathan, for that. What else? Do you want to talk about mid-term investments?

There's a question there. Gross margin MGM was impacted by the post COVID eruptions seeming to bottom in FY '23, do you see the prospects of this normalizing back to pre-COVID levels. I would say that our current MGM it is pre-COVID levels. You've got to look at the history of the business and the change in work mix of the business, which had an overall impact on our material gross margin. But if you normalize for that change in work mix over time, our MGM has been very stable. And as I said previously, we can see that in FY '25, we believe that will remain stable moving forward as well.

A question here asking, can you please expand on the national company uniform supply. I'm not sure whether that is specific to the opportunity that Chris just raised with us or more broadly national companies without going into depths of the new business opportunity we currently been live trialing for. I just talked about a couple of companies that we are supplying for nationally and the brands that you would know Reece. So all of the trades that are running around Australia and New Zealand with Reece branded T-shirts or hats or other collateral, we supply all of that to them. And we just got another 10 containers of Reece material arriving at the moment for trading for the upcoming 12 months. The other one that may be familiar with people would be a company called Certis. They run all of the security at Sydney Airport, Adelaide Airport, Sydney trains, events down at the races in Brisbane. We supply -- we design and supply all the uniforms for all security staff employed by Certis. So that part of our offer was recently new in the context of the last sort of 18 months, it's leveraging existing live infrastructure when we think about our sourcing capabilities in Southeast Asia and the teams that we have up there and our national 3PL business. So our ability to store the uniforms on behalf of the customers and deliver them directly to where those retailers are or where those staff are that need those uniforms. So hopefully, that gives you a bit more color on that question. And the last question here was some of the major retailers in shopper media advertising. Do we have any comment on this? Yes, we do. Clearly, the 2 big ones running under their own steam being primarily Coles and Woolworths and Woolworths with Cartology. We think there will be a range of retail clients that don't have the ability or capability to fund it and to set it up to the extent that Coles -- with Coles 360 and Woolworths with Cartology have done and that there will be an opportunity in and around that smaller retail space to help them with their shopper media ambitions and to be part of driving that strategy before them and generating a lot of content that they need in that space. So, absolutely, we've got an eye on what's happening in that shopper media space currently. Paul, that's currently all the questions that are in the Q&A box.

Okay. Well, that brings us an end to the Q&A session. Thank you to everyone for making the time to listen to the call today. And if you have any further questions, please don't hesitate to reach out to the team, and they will be happy to help. Copies of the webinar will be available on the IVE Group and the F&M website. Once again, thank you for everyone attending today, and have a great afternoon. Goodbye.