Johns Lyng Group Limited (JLG) Earnings Call Transcript & Summary

Thank you for waiting, and welcome to the Johns Lyng Group Financial Year 2022 Results Call. Today's call will be hosted by Johns Group CEO, Scott Didier. [Operator Instructions] Please go ahead, Scott.

Hi, good morning, everyone. My name is Scott Didier, I am the Group Chief Executive Officer of the Johns Lyng Group. Thank you for taking the time to join us on what I know is a busy day of announcements. Before I start on the review of the 2022 results and outlook, I'd like to introduce you to my fellow executives joining me on today's call: Lindsay Barber, Group Chief Operating Officer; Nick Carnell, Chief Executive Officer of Australian business; Matthew Lunn, Group Chief Financial Officer; Adrian Gleeson, Executive Director of Investor and Business Relationships; Pip Turnbull, Executive Director of Business Development and Marketing; and Gemma Sholl, Senior Executive Assistant to Lindsay, Matt, and John. Once we have concluded the briefing, we will be happy to answer any questions. Firstly, I'm very proud to report that FY '22 was another record year for JLG. On all key metrics, we achieved record results. Group revenue of $895 million was 57.5% ahead of last year and the group EBITDA and NPAT results grew 58.9% and 40.1%, respectively. With the 59% payout ratio, we increased dividends to our shareholders for the full year by 14% to $0.057 per share. These are excellent results by any standards. And before I delve into the drivers, I want to acknowledge the efforts of all of our business partners, employees who like many in the community have worked tirelessly in these challenging times. FY '22 reinforced that Johns Lyng is a defensive growth company. Our business model has successfully weathered the twin storms of inflationary pressure and supply constraints that have affected many businesses. I'm pleased to report that the early part of FY '23 has seen the continuation of these positive trends for JLG and I'll talk more about that on the outlook later. Our organic growth strategy is unchanged and focuses on geographical expansion, new client and contract wins and diversification into complementary adjacencies. The strata and broker segments remain a key focus and we see enormous potential in JLG in both markets. Our CAT business continues to grow. The unpredictable nature of these events make forecast difficult, but it is a fact that FY '22 saw the largest claim numbers on record, and that the Southeast Queensland, New South Wales floods are the largest catastrophe on the Insurance Council of Australia's record. We are prudent and financially beneficial. We will make bolt-on acquisitions, and our strong balance sheet and ample liquidity will allow us to remain agile when the opportunities arise. The significant acquisition of Reconstruction Experts in the U.S. provides Johns Lyng with a beachhead in a market where we see enormous potential for our model. Again, I will provide more detail on this later. Our core business comprised of Insurance Building and Restoration Services. Insurance Building and Restoration Services grew 67% at the EBITDA level. And BaU EBITDA growth within this segment of 61.9% demonstrates that our core business is growing strongly. During the year, we gained new clients and had contract extensions with groups such as CHU, Suncorp, Honey Insurance, Blue Zebra and Steadfast Claims Solutions. To service the requirements of the new business growth, we opened offices in Launceston, Echuca, Byron Bay, Coffs Harbour, Wollongong and Bairnsdale. Although the rationale of expanding our geographic footprint is always about supporting our BaU growth opportunities, it undoubtedly provides us with the best platform in Australia to respond to CAT events when they may occur. CAT EBITDA grew 88.1% during the year. On the 30th of March, we were honored to be awarded a $142 million contract by the New South Wales government to manage its property assessment and demolition program following the February floods. Having the capability and resources to work successfully with government at all levels is an important differentiator with Johns Lyng, and we properly enacted our CAT plan and distributed our significant resources to the impacted areas. We are proud of our long history in supporting Australian communities to rebuild following natural disasters, and we look forward to continuing to work with the New South Wales government and those impacted to recover from this truly devastating event. As I previously described, our expansion into strata services is at the core of our growth strategy. For our organic growth and acquisition, we have a solid base to leverage further growth. For example, there are more than 2.9 million strata units nationally with an insured value of approximately $1.2 trillion and our Bright & Duggan currently services approximately 89,000 of those units. We are very excited about this opportunity, we also see multiple cross-sell opportunities with our other business lines. As you would know the construction sector in Australia has faced challenging times in FY '22, our Commercial Building Services division performed strongly with EBITDA up 50.6%. This was partly attributable to the post COVID-19 recovery and the sales rebound of delayed projects. Our Commercial Construction unit was not immune to the underlying inflationary factors that have significantly affected the building industry. Although revenue grew strongly, the business recorded a small loss at the EBITDA level. As we expect these inflationary forces to prevail for some time, we are repositioning this business on a large loss insurance works and other contracts that are cost plus or construction management model. During the year, we made a significant and highly strategic acquisition in the US. On January 1, we acquired Reconstruction Experts, headquartered in Denver, Colorado. We paid $144.9 million and there are some earn-out provisions associated with this deal. The acquisition provided JLG with a profitable earnings accretive and established entree into the US market, but we believe we can leverage our core competencies in IB&RS and our Steamatic USA business. Reconstruction Experts primary customer base is Homeowner Associations, which are the US equivalent of the Australian Strata managers. The US is a large market with significant organic growth opportunities. We will also leverage our adjacencies from our existing US business Steamatic and from both commercial and geographic perspective. We also see opportunities in the CAT market for context. In 2021, there were 20 CAT events of greater than $1 billion in magnitude. Most importantly, we have acquired an outstanding management team. Its cultural value is strongly aligned with those of JLG. I've been in there for last 4 months to oversee the cultural alignment and ensure that every benefit can be extracted. As I said, this acquisition was earnings accretive from day one. We will make hay slowly and carefully, but we are very excited about this development opportunity, and I look forward to talking with you more about that in the future. Before I go into the outlook and forecast for FY '23, I'd like to spend some time looking at our financial position. At our core, we are a physically conservative company. When we acquired Reconstruction Experts, we decided warrant equity capital raising of $230 million. At the time we stated that although our balance sheet was strong, we had significant undrawn debt facilities and want to make a prudent approach to funding this acquisition. With other smaller bolt-on acquisitions, we have significant cash or credit to act and complete these deals effectively and quickly. Earnings accretive acquisitions are the key element of our business growth and we have a well-honed playbook when it comes to execution and integration of these deals. Our year-end balance sheet is strong. We have net assets of $333 million, net cash of $21.7 million and undrawn revolving credit facilities of more than $50 million. This is ample to fund organic growth and bolt-on M&A activity. I've already spoken to you in some depth about Reconstruction Experts. I'll now turn to our other recent acquisitions that will expand our footprint and increase our capacity and service our BaU and CAT segments strategically and geographically. Earlier in the financial year, we acquired Unitech Building Services in Adelaide. Unitech is a well-developed insurance business, that has synergistically with our existing IB&RS business. We also acquired 60% interest in Steamatic Australia, which consolidates our position as a leader in restoration services and is a natural progression of the acquisitions of Steamatic global franchise in FY '19. This provides us with a global ownership with the Steamatic brand and we use that position to focus on growing Steamatic globally and Precision Laser Cleaning. As with many acquisitions we make sure that the cultural alignment is maintained. Oliver Threlfall retains 41% equity ownership of Steamatic Australia and with his management team, we'll coordinate the international strategy of Steamatic. Steamatic US has 50 locations nationally, including significant exposure in Colorado, California, Texas and Florida where Reconstruction Experts has a strong footprint. We are very excited by the opportunities that exist around these businesses from a geographic and customer perspective. Lastly, on an acquisition front, we have acquired Trevor Bright's 44.5% equity in Bright & Duggan as announced last week with $25.6 million in cash and shares. This business leads and is pivotal to our Strata growth strategy. Bright & Duggan completed several bolt-on acquisitions during the year including change in Strata Management, Structure Building Management, Shift Facilities Management and BrisBay Strata Management. As I described, the overall market for Strata total building management and restoration services in Australia is very large. It's highly fragmented and we believe that our range of services will provide JLG with outstanding growth and synergistic benefits in the years ahead. The buyout of Trevor Bright's 44.5% interest in Bright & Duggan coincides with these retirement. I would like to acknowledge Trevor's outstanding contribution to the Strata industry in Australia to Bright & Duggan and by extension to Johns Lyng. Trevor's cultural legacy will be maintained as Chris Duggan, the Managing Director as his team remain in place. In recognition of the importance of the CAT category for JLG, we launched JLG disaster management in FY '22. I spoke earlier about how this allowed us to win significant work with the New South Wales government. Strategically with the business we own to service and assist state and local governments with major event preparation, response and resilient initiatives. This dedicated business will be able to draw upon the group-wide results of JLG efficiently and productively to assist Australian communities when CAT events occur. We are well-placed for another record in 2023. We're already seeing the impact of the ramp-up in job volumes from contract wins. I can tell you the first 6 or 7 weeks of the new financial year have been extremely strong. We are enjoying the benefits of deeper market penetration we have in Western Australia, South Australia, the northern territory in Tasmania. The roll-out and further integration of services in the Strata vertical is showing strong growth with potential for more. Although early days, Reconstruction Experts is demonstrating the financial and strategic logic for that acquisition is extremely strong. I'm pleased to provide the following guidance for the market. At this stage, we are forecasting total Group revenue of $1.03 billion for FY '23, which is a growth of 15.2% over FY '22. Of this, BaU revenue is forecast to be $930.4 million, which is a growth of 27.4% or 10.1% excluding FY '23 acquisitions. At the EBITDA level, we are forecasting 26% growth to $105.3 million, looking at the BaU basis translate into 43.3% growth to $93 million or 28.4% excluding FY '22 acquisitions. I'm very excited about the prospects for JLG in FY '23 and beyond. We have a full plate of opportunities to work on and note that we'll see many interesting opportunities this year. Again, I want to thank the JLG team for their tireless efforts and I want to thank everyone on the call for your time and interest. I along with our executive team would be delighted to answer any questions you may have.

[Operator Instructions] And as our queue assembles, we'll start by opening the Q&A with our first question by Piers Flanagan from Barrenjoey.

Just a couple from me if I can. Let me just firstly on the performance of RE over the second half. Will you be able just talk to the contribution to the broader group?

Piers, it's Matt Lunn speaking. Look, we're not breaking out the US as a separate segment yet. At some point in the future we'll take that under consideration. But at this stage we're not required to break it out as a separate segment. So we won't be disclosing that specifically.

Yes, that makes sense. And maybe just on that, then looking at '23 guidance. If we look at sort of the headline BaU revenue and then excluding acquisitions, sort of the difference is about $280 odd million, is that primarily related to them yet RE and some of the other acquisitions that you've made this year. Is that the best way to think about that?

Exactly right. So that revenue differential that you just mentioned of just over $280 million, that's the aggregate of Reconstruction Experts, which is of course the lion's share, but also the acquisitions we consummated in FY '22 being Steamatic, Unitech and then the 4 Strata bolt-on acquisitions.

Sure. And then just on the uplift in the Bright & Duggan ownership. Have you ever talked about the earnings profile of that business. And then also within the noncontrolling interest line, sort of what percentage would relate to Bright & Duggan. Just trying to think of the change going into FY '23 now that you've got majority ownership.

Yes. So I think probably the first point to make is that we always historically consolidated Bright & Duggan. So we always consolidated 100% of revenue and EBITDA. So the fundamental change with the buyout of Trevor Bright's 44.5% minority equity interest will be a reduction in the noncontrolling interest charge in the P&L. So on a pro forma basis for FY '22, that would have decreased by about $2.5 million. And so on that basis, it's earnings accretive of about [ 6% ] or so.

Right. And then just a final one on the cash collection. And I know there is a slide in the presentation deck. Are you able to just talk through what you've seen over the last 6 or so weeks post balance date in terms of invoicing and collections?

Yes, absolutely, I mean for context, Johns Lyng is a highly cash generative business. As we've demonstrated over the last kind of 5 plus years since IPO, ordinarily we would expect cash conversion from EBITDA to be between 80% and 100%. And in fact, we delivered almost 100% cash conversion from EBITDA in the first half of '22. The situation in the second half is, ironically, exactly the same with the situation in the second half of '21. So we're obviously responding to unprecedented job volumes as a result of the various CAT events that we're responding to. The biggest one is obviously the Southeast Queensland and Northern New South Wales floods. We've obviously incurred upfront costs, which have; one, suppressed the margin in the second half; but two, we've incurred those costs. That's compounded by the fact that the balance sheet has temporarily absorbed about $30 million worth of cash into working capital. And you can see that in the numbers. So accrued income has increased by about $30 million between the first half and second half. Obviously, accrued income is income that's earned, but it's not build. Now importantly, this represents thousands of jobs, so there is no concentration risk or credit risk per se. And so effectively, we've incurred costs from subcontractors, we haven't yet invoiced the clients. So that balance at year-end at the 30th of June, that accrued income has been invoiced, it has since been received. But obviously, we're continuing to operate with elevated levels of working capital. So whilst cash conversion has reverted to a more normal level, the balance sheet will actually release that $30 million worth of cash until the job volumes return to normal towards the back end of the cap.

Our next question comes through from Elijah Mayr from CLSA.

Just a couple from me. Maybe just starting on the strata business. Are you able to break out contribution of that in FY '22 and maybe just talking to the management fees and contribution to [ call out work? ]

Yes. So I mean, historically, we have given a bit more color on the strata services business. So I think what I can say is, Elijah, it's been a very, very strong year for Johns Lyng strata services. In aggregate, we delivered about $90 million worth of revenue in that segment, which is very strong. And that represents growth on FY '21 of about 21%. Johns Lyng strata services include strata management, which is the core business of Bright & Duggan and also Strata Building Services. Strata management contributed about $51.4 million revenue, which is just over 23% year-on-year. And Strata Building Services contributed about $38.3 million revenue, which when you strip out tax, we delivered about $31.1 million revenue, which is growth of 62%, so very, very strong underlying organic growth in the Strata Building Services component year-on-year.

And then maybe just with Bright & Duggan taking the remaining part of that business, is there any changes, I guess, operationally or strategically for Johns Lyng now that you do own 100% of the business?

I think now – obviously, now that we own the majority, we're looking at the management tenure we'll move forward with. So [indiscernible] we've spoken around, and one in particular over the last couple of months, those will materialize over the next few months. We're excited about some of the appointments we'll make over the next 6 months, which again along with that partnership model give us more flexibility to be able to tie these [ probably ] longer term.

Yes. And then maybe just lastly just on -- maybe some comments on the pipeline for acquisitions and then maybe specifically talking to the U.S. And have you seen any sort of specific challenges or differences there when you're looking for acquisition candidates versus what you've done here in Australia?

No. They're very much the same. We've got the same disciplines in what we look for in the U.S. is what we've done in Australia. It's really all about ongoing management, young motivated partners that we can go forward with. And the cultural alignment is key to us. Somewhat challenging to find all those, but that's what we look for and that's we don't deviate from that.

[Operator Instructions] Michael Peet from Goldman Sachs.

Just on Reconstruction Experts, just could you directly comment on how the pipeline and order book has gone since acquisition. Just trying to get a sense of how that's building?

Yes, it's building, it's very good. I've got to say, they've had some really good wins. And they're up and I think we've got the exact numbers in that on the sale proceeds, but they're falling at the moment, Mike.

Yes, I think it probably in terms of a bit of color around Reconstruction Experts, I think at the time of acquisition we released a very detailed presentation, which kind of gave some color around the backlog and the pipeline. So if we reference numbers at September '21, which was the date of the data released, but then your backlog was $115 million. And as of today backlog is at $168 million. So backlog is contracted work, 50% of that is scoped backlog. So the scope is agreed. And that's expected to be delivered over the next 6 months to 9 months and the other half 50%, $85 million or so is on the scoped backlog. So we are still defining the scope for that, but that's again expected to be delivered over the next 12 months to 15 months. So the important takeaway there is that the backlog, which is the contracted work in hand has increased by about 46% since our last detailed announcement around Reconstruction Experts.

And if I just put it in a bit of layman's term there, Michael, just coming back on Friday morning, I was spending 4 months, they're absolutely on fire. Moral is up, they're all up and about and it's just a buzz, they're really going well.