IVE Group Limited (IGL) Earnings Call Transcript & Summary

Hi everyone, and welcome to the IVE Group First Half FY '25 Financial Results Webinar. My name is Abby Phillips, and I'm your host for today. On the call, we have CEO, Matt Aitken; and CFO, Darren Dunkley. [Operator Instructions] Without further ado, I'd like to hand over to CEO Matt Aitken to start the presentation. Matt, are you there?

I am. Thanks, Abby. Good morning, everyone, and welcome to the presentation of IVE Group' H1 FY '25 results. As Abby said, I'm joined this morning by our CFO, Darren Dunkley, and together, we will step you through what is a very solid result for the first 6 months of FY '25. So we turn to Page 3 of the presentation. I just want to touch on some of the key highlights for the half. All key profit metrics are up significantly. We've had strong margin expansion and further uplift in operating cash flow with working capital levels normalizing. And the balance sheet, as you can see, has been further strengthened with gearing continuing to sit below our internal target. At an operational level, we have delivered all of the Ovato cost synergies, so they've been fully realized. We've delivered all of the JacPak cost synergies and they've been fully realized. And we have integrated Elastic completely into the group post-acquisition of that business in May this year -- May last year, sorry. At the AGM, also gave you an update on the substantial consumer research project we had undertaken in relation to catalogs. This research has continued to drive strong retailer engagement with retailers such as Bunnings and Harvey Norman coming back into the catalog channel during H1. But most importantly, Coles returning to the letterbox channel for catalogs late in H1 and we continue to have great conversations with retailers about the power of that channel. And on the growth front, at a packaging level, we've committed now all of the JacPak revenue that was available to us when we acquired that business just over 12 months ago and we've purchased a range of equipment to assist with the build-out of our organic expansion plans here in New South Wales for the packaging side of our business. As I said, Elastic's been fully integrated into the creative and content service offering and I'll touch on that more as we go through the presentation. We're relocating our 3PL business, a third-party logistics business to a new 32,000 square meter facility in Dandenong South in early FY '26. We're developing a Sydney supersite consolidating 4 business units into 42,000 square meters in Kemps Creek, again, a move that will happen in FY '26. And Lasoo continued its strong momentum with annualized GTV of $27 million in November, up 93% on PCP and ahead of what I guided at the AGM, which was $24 million. And I'll cover these initiatives in more detail later in this presentation. As we turn the page to the financial performance dashboard, illustrating a strong interim performance underpinned by the margin expansion I referred to earlier. Revenue of $507 million was stable on PCP. Pleasingly, material gross profit margin of 48.5% was well up on PCP of 46.2% and EBITDA of $74.1 million was up 12.6%. NPAT of $29.3 million was up 29.1% and EPS of $0.19 per share, up 28.1% from 14.8% per share PCP. Again, the operating cash flow I touched on earlier, up to 92%, up from 84% on PCP and net debt lower at $121 million, down from $131 million at 30 June. The company has announced a fully franked interim dividend of $0.095 per share, unchanged from $0.095 per share PCP and consistent with the guidance that we've provided. And I'd also like to point out the substantial improvement in our IFRS NPAT at $27.1 million, up 108% on PCP. I'll now hand over to Darren to walk through the financial section of today's presentation and I'll come back and talk about the growth initiatives later on.

Thank you, Matt, and good morning, everyone. I will now take you through the financial section of the presentation, starting with profit and loss Pages 6 and 7. Strong profit growth underpinned by material gross margin, MGM expansion and delivery of promised cost synergies. Revenue up 0.4% on -- to $507.8 million. Revenue includes $15.8 million of incremental revenue from JacPak, which was acquired on the 31st of October, 2023. Base revenue down 3% relative to PCP, impacted by softer economy and nonrecurrence of large one-off prior period projects, including the Voice Referendum and FIFA Women's World Cup. Brand activations, 3PL and packaging experienced strong halves with new clients, business wins including household brands in the FMCG and pharmaceutical sectors. Material gross profit margin, MGM, which is revenue less material cost of goods sold, MGM improved to 48.5%, up from 46.2% in PCP. This margin improvement reflects input cost relief and business mix changes. Underlying earnings, as Matt touched on, was very strong. EBITDA increased 12.6% to $74.1 million, up from $65.8 million in PCP. EBITDA margin up strongly to 14.6% from 13% PCP. EBIT up 23.4% to $51.4 million, up from $41.7 million PCP, partly driven by reduced depreciation expense relating to Warrick Farm Ovato site. NPAT margin up strongly to 5.8% from 4.5% of PCP. The strong increase in profitability reflects improved MGM and operating efficiencies, coupled with earned cost synergies from Ovato and JacPak. Nonoperating items. Nonoperating items of $3.9 million pretax significantly reduced on PCP, refer Appendix A. Excluded from underlying earnings were made up of $3.2 million Lasoo operating loss, consistent with guidance, $0.6 million restructure costs. FY '25 full year restructure and other costs are expected to be around $3.5 million. It is important to note that excluding Lasoo, restructuring and other costs are $0.7 million for the period compared to $10.9 million in PCP. Turning to Page 8, the balance sheet. Gearing trending further below internal benchmark. Cash at bank $49.5 million. Net debt decreased to $121.4 million during the half, reflecting continued strong cash flow and greatly reduced restructuring costs, partially offset by peak working capital seasonality and CapEx associated with the packaging capacity build-out. Net debt is down significantly from $165.4 million at 31st of December, 2023. The prior period included $28 million of JacPak acquisition funding since repaid. Gearing is trending further below the group's internal benchmark of 1.5x pre-AASB 16 EBITDA or less than 1x post-AASB 16 EBITDA. Undrawn debt capacity of $65 million, including acquisition facilities. Page 9, capital expenditure. Packaging capacity build-out underway. Capital expenditure was $13.8 million for the period, including $8.5 million related to the packaging capacity build-out, largely for the purchase of replacement sheet-fed presses, also capable of printing on board for packaging as well as packaging finishing equipment, which includes die cutters and folders. FY '25 CapEx is now expected to be around $32 million, including $18 million related to the packaging capacity build-out. This is net of disposal proceeds. The increase in expected FY '25 CapEx reflects the bringing forward of additional packaging equipment purchases for the Phase 1 expansion. Cash flow and dividends, further uplift in cash conversion. Operating cash conversion to EBITDA up to 92% from 84% in PCP, reflects return to more stabilized levels of inventory, paper holdings and working capital following improved supply chain certainty and the Ovato transaction. Working capital is expected to remain relatively stable hereafter, broadly in line with revenue seasonality. The Board declared a fully franked interim dividend of $0.095 per share, which is stable on PCP and consistent with guidance. I will now hand you back over to Matt to take you through the balance of the presentation. Thank you.

Thanks, Darren. We turn to Page 12 and touch on packaging a bit further. As mentioned earlier, $2.4 million of JacPak cost synergies were fully realized by 30 June, 2024, and have contributed to the earnings during the half we've just spoken about. JacPak contributed revenue of $24 million during the half. $15.8 million of that was incremental, which was in line with expectations. The recent new business successes include household brands in the FMCG sector like Sanitarium, Sara Lee and Peters Ice Creams and we've got a strong and active pipeline for new business currently in play. Notwithstanding the lengthy revenue lead times on some contracts and opportunities, JacPak's $15 million of available capacity that we had at time of acquisition is now committed as we look out to FY '26. As we've previously indicated -- turning to Page 13, as we previously indicated, we intend on servicing national brands through packaging operations in both Victoria and New South Wales, supported by our national 3PL network. In Victoria, JacPak or IVE Packaging will continue to operate as a stand-alone business down there with annual revenue capacity of $60 million. And in New South Wales, we'll build out a greenfield state-of-the-art packaging facility as part of the consolidation of businesses into the Kemps Creek super site, which I'll talk about in the coming slides time. And combined, these sites will result in total packaging revenue capacity of around $90 million per annum. And as you can see from the chart on the right-hand side of this page, for Phase 2 additional investment would be required to add a further $60 million to the capacity, resulting in ultimately a total annual packaging revenue capability of $150 million in 5 years over a 5-year period. We turn to Page 14 and on to creative and content. The integration, as I said earlier, of Elastic into Sydney and Melbourne has gone really well and it's been received extremely well both by Elastic customers and IVE customers. It's rapidly advanced our creative and content offering in line with our strategy to grow revenue and capability in this space. And Elastic's creative and strategic expertise in TV, video, digital and social media has been the perfect complement to our strengths in CX design, data and content production capabilities. We're helping brands efficiently target and connect with customers across every media touch point. And if you click on the squares on the right side of this page and we're taking some of Elastic's work, particularly recent campaigns we've done for Kia, launching the EV5 and capturing activations at the Australian Open last month. If we turn to Page 15, let's touch on 3PL, so our third-party logistics part of our business. So with strong growth in our 3PL operations and the upcoming expiry of our warehouse lease in Braeside, we're relocating to a brand-new purpose-built facility near Dandenong South. The 33,000 square meter facility will become our largest 3PL site in the country and provide an additional 60% of storage in Victoria in turn increasing our national capacity by 30% to 80,000 square meters. Groundworks on the site started at the end of 2024 and practical completion is expected by September 2025. In terms of benefits, clearly, it provides additional space for us to expand the business in Victoria and it will be initially racked for 25,000 pallet spaces, to provide a dedicated in-house logistics services for JacPak, which are currently outsourced and operating efficiencies through the consolidation of 2 existing Braeside warehouses, including common operating functions and reduced duplication of resource and equipment. It clearly is also a great facility for our staff. So as I said earlier, once relocated and that is completed in late 2025, the 3PL business will now have 80,000 square meters of modern, highly efficient logistics facilities right around the country servicing our clients. Moving on to Page 17. Consistent with our strategy in Braeside, Victoria 3 years ago, where we built a supersite down there, we've recently committed to the development of a 42,000 square meter super site in Kemps Creek in Western Sydney. The supersite facilitates our strategy of expanding into horizontal adjacencies such as packaging to drive revenue and also continued focus on operational efficiencies. Through this process, we're relocating 4 business units to the Kemps Creek supersite, that being or those being our commercial print business in Silverwater, our brand activations business in Granville, our CX and data business in Homebush and our paper storage site at Warrick Farm. And at the same time, we'll build, as I said, a state-of-the-art greenfields packaging capability within the site to continue the expansion of our packaging strategy. The site is close to our Erskine Park and Huntingwood sites, thereby bringing the majority of our Western Sydney teams much closer together. It is also very close to key transport hubs. And groundworks have commenced recently with practical completion expected at the end of this calendar year and I would expect the site to be fully operational by early 2026. Again, a range of benefits coming from this initiative and this move, one of those being the mitigation of an additional $3.1 million in annual rent had we stayed in the existing sites that we are leaving. Operating efficiencies, including consolidation of leases, equipment and common operational functions, a centralized approach to labor, optimizing our labor mix and enabling flexibility across business units and reducing external labor hire and space to accommodate further expansion, particularly facilitating the Phase 1 and Phase 2 of the packaging strategy. And again, similar to the 3PL site in Victoria, a more fit-for-purpose and modern working place for our staff. We will, at the FY '25 result, communicate what the expected capital expenditure relocation costs will be associated with that project. Touching on Lasoo. We continue to execute on our Lasoo strategy by rapidly scaling our deals marketplace and you can see this as illustrated by the charts on Page 20 of the presentation. At 31 December, we had 255 retailers on the platform with a very healthy pipeline, including a number of retailers contracting onto the platform in recent weeks as a result of the announced closure of Catch. With over 80% of the total investment being CapEx and cumulative after-tax losses and Lasoo already incurred by the end of FY '25, we wanted to provide further detail in relation to the pathway to breakeven and profitability for the marketplace. And as you can see from the chart on the right side of Page 19, we remain on track to breakeven during FY '28 with plans to grow GTVs or gross transaction value to $150 million by FY '30. This is consistent with what we've guided previously at both the AGM and the FY '24 results, at which point it would equate to revenue of around $23 million, EBITDA of around $4.5 million and NPAT of around $3.1 million. We move on to our outlook and guidance. Reflecting a strong start to the year and the sound new business prospects for H2, the group has revised its FY '25 underlying NPAT guidance range to $47 million to $50 million, noting that our NPAT guidance excludes the Lasoo operating loss, which is going to be consistent with FY '24 and restructuring and other costs of around $3.5 million. CapEx, as Darren has alluded to, is now expected to be $32 million, including $18 million related to executing on the packaging strategy. And consistent with messaging again at the FY '24 results and AGM, our annual dividend is expected to be held steady at $0.18 per share for the foreseeable future, reflecting the already substantial dividend yield and preserved cash to pay down senior debt, fund future growth initiatives and/or capital management options. Our net debt at 30 June, 2025 will continue to remain below our internal benchmarks that Darren has communicated already. And considering this and the group's consistently strong financial performance, the Board and management view IGL's share price is offering significant value at current levels and accordingly today, has initiated an on-market share buyback of up to $10 million. Further to drive alignment between executives, employees and shareholders, IVE has put in place an Employee Salary Sacrifice Share Plan for employees as well as director and executive minimum shareholding guidelines. And we intend on hosting an Investor Day strategy session in late Q4 and I look forward to seeing many of our shareholders on that day. I'd like to thank all of our staff, customers and partners for their contribution towards the strong H1 result. We're now happy to open the call for any questions. Thank you.

[Operator Instructions] So first up, I can see we have a question from Chris.

Just looking at the guidance, like it basically implies a second half underlying NPAT of around $20 million to get you to the top end, which is consistent with the second half last year. When first half was up so strongly on PCP, why are you only expecting a flat second half result?

So a couple of things for us, Chris. One is we've got a federal election coming. So we're concerned about what, if any, impact they might have on the economy and on trading. We also don't have any of the Ovato synergy benefits flowing through in H2 that we had flowing through in H1. So you might remember the prior H2 period, we were fully integrated at that stage with Ovato. So you won't see any significant uplifts off the back of those acquisitions like we saw in H1. And traditionally, we're a seasonally wider business in H2, as you've alluded to and generally sort of a 55-45 business H1 to H2. So they are the main reasons that we've been prepared to up the guidance into the upper range, Chris, but not bridge it outside of the original range we've given, noting though that we do have a planned Strategy Day for shareholders coming later in the financial year and would expect at that point, we may be in a position to provide a further trading update.

And One of the highlights for me was the uplift in gross margin in the first half to 48.5%. Do you think that's sustainable going into H2 or would you expect some sort of pullback?

I think at the moment, it's sustainable, Chris. I mean, it's -- the supply chains are pretty stable at the moment, which is good. There's various reasons why that may be impacted. One of those could be, for instance, currency-related. But look, I think from where we're seeing it right now, notwithstanding some of the broader macroeconomic things at play, both overseas, maybe through the U.S. and then what might happen here locally, I think we're comfortable with how that margin is going to hold up through the half.

Okay. And last question, if there was anything disappointing in the result for me, it was probably just the lack of revenue growth. Are there any initiatives or things that could potentially uplift that growth rate in the second half, like the federal election or the additional JacPak capacity, which you've now basically filled?

Yes. I think it's fair to call that out. That would be the one thing we were disappointed about, too, Chris, was the revenue number. There's no doubt from mine that we've got a very healthy pipeline right across various parts of the business. It is a bit hard to see through the federal election at the moment the crystal ball. We do do work in that space when election takes place, but it is also budgeted for us. So we've got a rough handle on what that should look like. So no, I think we're doing a lot internally within the business to continue to drive new business forward. And yes, I would like to think by the time we are back around the table, be it later this financial year or the full year results, we've got some really good new business things to announce at the same time.

McDonald's?

Still in play, Chris. Absolutely. So that's still decision from Mac due in about May.

That's the longest tender I've seen.

It is.

So now we have some questions from Jonathan Higgins. [Operator Instructions] I'm not sure if Jonathan is there, but there are 2 questions here. I might just ask for him. So can you remind us on the margins of out of JacPak? Effectively, what does $160 million of revenues look like longer term?

Yes. Yes. I mean our JacPak revenue MGM would be similar -- margin would be similar to that of the consolidated business. So the 48.5% for our MGM would be what we would expect for JacPak moving forward. However, we may move into some work that is more commoditized to hit that $160 million. So that may have some downward pressure in that sector on our MGM. But overall, our EBITDA margin from JacPak would be along similar lines of 12% to 14% in line with the balance of our business.

Thank you. And then through normalized WC and cash flows expected in H2, further to this, is a reducing interest rate environment positive for the group, noting you are doing really well, but economic conditions have been tough?

Yes, definitely -- I mean, we've reduced our net debt to PCP quite significantly as I certainly pointed out, but a reducing interest rate environment, I definitely think that will be positive to the group on a interest expense perspective and overall economic activity perspective.

Thank you. And then next, we have some questions from Shane. [Operator Instructions]

Just one question. I, in fact, picked up what you said, Matt, when you ran through the catalog business. Particularly, you said you've been through some sort of review. You did mention that Harvey Norman and Bunnings have returned. But did you also say that Coles have returned to the service as well?

I did, Shane. Yes. So late in the half, Coles returned to the letter box channel with catalogs and they continue to be in that channel now and I believe it's working well for them.

Is that to the same level that they were before they took the business away?

No, not to the same level yet, Shane, but they're sort of continuing to build up, I guess, as they go through what was initially a test phase for them and they've moved out of that test phase into sort of a wider expanded reach. But no, not up to the full extent of what it was leading into 2021.

And more broadly, you said that Bunnings have come back into the business, Harvey Norman's come back into the business. So the business is looking revitalized.

Yes. But I think the -- it just shows to me the quality of the consumer research that we did to prove up the value of the catalog as part of a retailer's marketing mix and some of the additional work we're continuing to do in that space to prove up the results that catalogs actually deliver in store. So we did a lot of "research." We had a lot of data available to us as part of that to prove the value of the catalogs. It's been really well received by retailers and we have seen retailers specifically like Harvey Norman and Coles and Bunnings entering back into that channel after having been out of it for some time really since the COVID time. So -- and factually, that would appear to be working well for them at this stage.

If we don't have any other questions from any of the other analysts, we might just go to the Q&A box. So Matt, I'll hand it back to you to answer some of those written questions. If you're having trouble finding the Q&A box, you should just be able to hover your mouse at the top of the screen and it should show up.

Abby, we've lost connection here to the Q&A box. So can you just read maybe the questions that are there and I'm happy to just take them on notice and answer them as we go through.

Yes, of course. No worries. So firstly, congrats on the strong results and thanks for all your hard work. Concerning Lasoo, you are targeting NPAT of about $3 million by FY '30. How much capital do you think it will have consumed by then, especially in OpEx over $30 million? And how confident are you that it will justify itself?

Yes. So I think maybe Darren and I might tack a little bit on this. As I alluded to when I went through the last 2 slides and it's in the deck, by the end of FY '25, we will have incurred 80% of all of the CapEx and after-tax losses associated with this platform. And by putting the chart into Slide 19 today, hopefully, that gives shareholders a clear line of sight as to how those losses continue to become less, if you like, as we head through to about FY '28 when we hit that breakeven point and then obviously build out to the FY '30 numbers that we've talked about here. From our perspective, we think it's still a well worthwhile part of our strategy and should represent good value at that point in time by the time we get to that point. We're very happy with the progress of the platform. So everything at the moment is continuing to go to plan. So there's nothing there concerning us that we won't hit those numbers that we've outlined in this. And we've got a lot of levers to be able to play with at any such point in time, we were concerned about it, we wanted to dial that back and we can do it quite quickly so.

Yes. Our overall investment in Lasoo by the end of FY '25, including the NPAT losses and CapEx would be circa $20 million. So overall, up until we achieve breakeven in FY '28, it will be closer to $30 million in overall investment in Lasoo. But then you can see that the returns will build relatively quickly and good margins as a percentage of true sales rather than gross transactional value and in line with the rest of our business as well. So I definitely think it's been a worthwhile investment.

Great. So we do have another question here. So another set of very clean numbers. Congratulations, Matt and Darren. Given the headroom in your debt facility and growth ops in production/creative, are you seeking further acquisitions to scale this offering alongside Elastic? Or is focus for next FY on the new supersites?

For us, it's a combination of both. It's clearly really important that we execute on both the 3PL move in Victoria and the supersite move in Sydney to drive out those efficiencies that we're looking for to deliver that next level of customer experience that we know we were able to deliver when we did the Braeside supersite 3 years ago. So that's been -- that's a real focus for us. There's no doubt certainly from a balance sheet perspective that if the right acquisition was to come along, we would definitely consider it. And it's one of the reasons we've kept the balance sheet strong so that we've got that ability to look at any growth opportunities that might present themselves to the group, not just in the content and creative space, but there may be across other parts of our business and our value proposition too that we'd consider acquisitions accordingly. But there's nothing in play at the moment. So we remain focused on the relative capital management initiatives that we called out today, the share buyback and also just continuing to pay down senior debt.

Thank you. So that does bring us to the end of the Q&A section. Thank you, Matt and Darren, and thank you, everyone, for making the time to listen to the call today. If you have further questions, please reach out to the team and they will happily help. So copies of this webinar will be available on the IVE Group and Sharecafe websites. But again, thank you, everyone, for your time.

Thank you.

Thanks, everyone.