Lynch Group Holdings Limited (LGL) Earnings Call Transcript & Summary

Good morning, and welcome to the FY '25 investor presentation for Lynch Group Holdings. As with all of these presentations, if you wish to ask question, we're more than happy for you to answer, leave those at the bottom of your screen and we'll work through those in turn. But without further ado, let me hand over to Hugh Toll, CEO of Lynch Group. Thanks again.

Good morning to everyone on the call. Thanks for your time. My name is Hugh Toll, and I'm the Chief Executive of Lynch Group, and I'm joined by Steve Wood, our CFO, who will cover off the financials as part of this briefing. I'll move straight to the results presentation released to the ASX this morning and start with the financial year '25 group highlights section on Slide 5. The group's full year results finished ahead of the updated guidance provided to the market in early June at both revenue and EBITDA. Results reflect a continuation of robust demand in our Australian operations and an improved second half performance from our China business with pleasing year-on-year growth in pricing across the major event windows. Our FY '25 results reflect 8% growth in group revenue year-on-year. Australian customer demand remained strong across the year with supermarket customer collaborations across rebranding and a resumption of sale or return store conversions, supporting a positive growth result. The Australian revenue uplift was also supported by pleasing growth from our wholesale markets channel, which predominantly services florists. China also delivered strong year-on-year revenue growth, delivered via higher volumes of both roses and tulips, improved tulip pricing and increased export volumes. Event demand and pricing across the second half of the year was significantly improved on prior year. Group EBITDA of $43.2 million, exceeded last year's result by 9%. Australia's result improved by 8%, driven by top line growth and supported by a 20 basis point expansion in margin. China EBITDA improved 13% year-on-year off the back of a strong second half performance during key events. Whilst we are seeing a steady improvement in consumer demand and confidence, demand remains patchy outside of event windows. The group has also announced today that it is entering into a Scheme Implementation Agreement with Hasfarm Holdings Limited, in which Hasfarm has agreed to acquire 100% of the shares in Lynch by way of a scheme of arrangement. Lynch shareholders will receive $2.245 per share in cash, inclusive of a $0.09 fully franked dividend payable on 18 September, irrespective of whether the Scheme is implemented. The Lynch Group Board has provided unanimous support for the Scheme. Turning now to the Australian highlights on Slide 6. FY '25 revenue finished 6% up year-on-year. Customer demand for supermarket floral products remained resilient across the year with early signs of an improvement in consumer confidence as interest rates ease and employment markets remain strong. The event window across the second half of the financial year was particularly strong for our Australian operations with key supermarket events across Valentine's Day and Mother's Day, delivered in full, achieving excellent sell-through rates in store for our customers. Growth was boosted across the year by close collaboration with a major customer in a brand launch and range refresh as well as a resumption in sale or return store conversions. Whilst we continue to see declines in potted revenues from the peak in 2021, consumer demand for floral continues to more than offset the mix shift impact of these declines. EBITDA growth outperformed top line growth across the year as ongoing cost management and efficiency initiatives delivered improved margins on a higher revenue base. Ongoing investment in automated bouquet lines has also improved efficiency and derisked execution for our major event periods, where volumes increased three to fourfold on ordinary week throughput. The SAP system upgrade project has progressed through testing, and we expect full implementation this quarter with costs finishing in line with expectation. Moving to China on Slide 7. Our China segment revenue finished 18% up year-on-year. The increase resulted from a combination of a 4% improvement in farm production volumes with growth in both our key rose and tulip lines, a 7% increase in farm ASP, underpinned by broadly flat year-on-year pricing for roses and a 25% lift in tulip pricing and higher export revenues from increased volumes into Australia, which also included the pass-through of outbound freight costs. China's improved EBITDA performance was primarily generated from a lift in pricing across the key second half events, which now encompass Chinese New Year, Valentine's Day, International Women's Day, Mother's Day and the 20th of May. In general, consumer demand is showing gradual signs of improvement, albeit concentrated in the event windows where gifting, consumer connection, and engagement to individual events tends to drive better pricing and market demand. Our multichannel sales strategy underpinned by 3 distribution points in Kunming, Shanghai and Guangzhou continues to enable price optimization for our products across the seasonal calendar cycle. We continue to closely monitor and control cost and labor efficiency to ensure we maintain a highly competitive unit cost of production across our distributed volumes. On investment, we continue to take a measured approach to greenhouse expansion given current market conditions with the first half addition of 1 hectare to support our expanding amaryllis production program. I'll now hand over to Steve, who will take us through the full year financials.

Thank you. Good morning, everyone. Our FY '25 results reflect revenue growth and margin expansion in Australia and the continuing effects of weaker pricing in China. The results exceed the top end of the guidance range from June with group revenue of $430.5 million, up 8% on the prior year and growth in Australia, especially in floral in the supermarket category and growth in China from increased tulips and the export channel. Underlying EBITDA for the year of $43.2 million, is up 9% on the prior year. In Australia, margins have improved by 20 basis points to 9.6%. And in China, margins have declined by 50 basis points also to 9.6%. Cash conversion for the full year was 96%, continuing the longer-term trend of strong cash conversion. The seasonality of cash with a high conversion in the second half as inventory build unwinds was again evident in FY '25. And the group has today declared a final fully franked dividend of $0.09 per share with a record date of the 3rd of September and an expected payment date of the 18th of September. This brings the total dividends for the year to $0.14, an increase of $0.02 over the previous year and with a dividend yield of 7.8%, based on 30-day VWAP. Moving to the Australian segment, which has delivered both revenue and EBITDA growth during the year. Revenue of $350.6 million, is a 6.4% increase on the prior year, with growth predominantly driven by consistent demand for floral products in the supermarket channel. For the second half, which includes the Valentine's Day and Mother's Day events, revenue increased by 8.7%. The floral category is up 11% for the year, continuing recent trends of preferences for that floral category. There were 50 SOR conversions, store conversions in the second half of the year, and this has increased the penetration rate of SOR to 29% of the key customers' total store network, up from 26% in the prior year. Australia EBITDA of $33.5 million, is up 8.1% on the prior year, with EBITDA margin achieving a 20 basis point improvement to 9.6%. Much of that margin improvement can be attributed to profit improvement initiatives progressed throughout the year, especially in the areas of labor and freight. Two sites in Australia now have automated bouquet lines in operation with a third site due online in early FY '26 and early signs promising for future efficiencies. Progress on a dynamic freight management system has also delivered savings in domestic freight. The international freight rates remain largely normalized with the exception of China rates, which are still elevated. Included in these results are the revenue and EBITDA impacts of the Queensland cyclone from March. We estimate a lost revenue impact of around $2 million and lost EBITDA impact of $800,000 as a result of customer store closures during that period in March. The group's ERP system upgrade is nearing completion with the first phase expected to be implemented in Q1 of the current financial year. Moving to the China segment. China revenue is $101 million, up 18% year-on-year. The increase in revenue is from a combination of strong performance in the tulip category and increased volumes through the export channel. Tulip volumes increased by around 10% for the year with ASP up 25%, partially offset by increased bulb prices in a tight market. This resulted in a circa 40% increase in tulip revenues for the year. Rose ASP was similar year-on-year, but it is worth noting that the second half price was up an average of 7%. So China EBITDA of $9.7 million, is up 12.7% on the prior year, with EBITDA margins down 50 basis points to 9.6%. The margin was affected by higher energy costs, the tulip bulb costs and additional export freight to support the volumes. Farm costs continue to run in line with expectations. The cost of operating the China business have remained well controlled with those key production costs in line with our expectations. So the full year profit and loss statement shows an operating margin of 21.8%, slightly behind the 22.1% last year, but a similar operating margin. Operating costs increased by 4% with most cost lines from -- increasing from inflationary impacts. The largest increase in those operating costs was in occupancy costs from property rent, not within the scope of AASB16. Depreciation and amortization increased by 7%, with depreciation on property, plant and equipment and right-of-use assets both increasing with amortization remaining consistent year-on-year. The financing costs reflect higher lease interest charges with the cost of debt -- external debt reducing slightly from lower interest rates. At the bottom line, the net profit after tax, adjusting for noncash amortization is $10.2 million, which is up $1 million from the prior year. Cash conversion is 96%, in line with prior year trends of pretty strong cash conversion. The sell-through of tulip bulbs and utilization of inventory on hand has led to a positive working capital impact on the second half. And as I noted earlier, the seasonality impacts of working capital are well established with investment in the first half, generally realized in the second half. Lease interest, tax and maintenance CapEx were lower in FY '25 than the prior year, largely from a reduction in income tax paid. The dividends out there of $15.9 million is made up of the $0.08 paid this time last year and our interim dividend paid in March of $0.05. CapEx spend of $7.2 million includes growth of $3.9 million and maintenance of $3.2 million. CapEx spend has reduced compared to recent years from a reduction in the development of China farms. Growth CapEx of $3.9 million includes investment in automated bouquet lines in Australia, moderate greenhouse expansion and other farm infrastructure in China, including spend to support those increased tulip volumes. The maintenance CapEx of $3.2 million is a slight reduction on the prior year due to reduced investment in Australian farms following the strategic decision to exit 2 of those 3 farms in the current year. And the closing developed land area of 85 hectares in China includes 1 additional hectare developed during the year as the CapEx plans for greenhouses remained moderated. And on to the balance sheet remains healthy with total net assets of $182 million and a net debt-to-EBITDA ratio, excluding leases of 0.7x, which is in line with the prior year. Property, plant and equipment and right-of-use assets were both impacted by the Australian farm closures with impairment provisions taken for the relevant assets during the year. Trade receivables and payables -- trade payables are both higher than the prior year, largely impacted by an early balance date in FY '25, the 29th of June as opposed to 30. Borrowings are unchanged at $55 million with around $27.5 million of undrawn facilities remaining across the group at the balance date, mostly in Australia with some in China as well. Banking covenants for the period were achieved with satisfactory headroom. We've provided revenue, EBITDA and key operating metrics split between geographies as well as the reported to stat reconciliations and an update on the financial impacts of the Australian farm closures in the supplementary pages at the back of the investor pack.

Thanks, Steve. Now turning to Slide 17, which goes to current regional trade settings. In Australia, we continue to experience positive momentum for floral products with our major supermarket customers with Australian revenue growth, up 4% for the first 7 weeks of the new financial year. Sales growth from our supermarket sale or return network remains materially higher. Successful execution of the group's key events across FY '25 has laid a very solid foundation for further growth across this year's events with all customers. Our ability to consistently execute on large national events remains a defining competitive advantage of our business. The demand dynamic for supermarket floral products remains positive and is currently underpinned by sales momentum from the FY '25 customer brand launch already highlighted as well as the full year run rate of sale or return conversions, completed during the second half of FY '25. Demand from florists for our markets operation is also trending positively. Investment in Australia is currently focused on efficiency projects and the relocation of our West Australian site, which is expected to be available to us around June next year. And in China, we are experiencing a more reliable uptick in demand during key event windows and less consistent demand outside of these windows, likely linked to the deflationary environment that parts of the China economy is currently experiencing. For the first 7 weeks of FY '26, China revenue is down 14% during a period, which has experienced extreme rain and heat conditions across both Kunming and key customer markets across China. This revenue decline is primarily attributable to year-on-year volume declines tied to the recent weather conditions. We continue to carefully manage and control our CapEx and expansion programs in China and expect to only add modestly to our capacity in the year ahead with our tulip and Lilly production footprint. We're also assessing further geographic reach for our distribution network beyond our current 3 city footprint of Kunming, Shanghai and Guangzhou, likely to be executed on a low CapEx basis in the second half of the financial year. And moving finally to Slide 18 for the group's overall outlook. Australian revenue growth is expected to remain positive, supported by our product and service value proposition and the increasing floral industry share of supermarket customers. China revenue performance remains closely tied to a steady rebound in consumer confidence and spending over the year ahead. Australia's EBITDA margin rate is expected to be in line with FY '25, and China's margin rate will be dependent on market conditions and pricing across winter and into the second half of key events. And finally, as usual, we'll provide a further trading update at the group's AGM in November. So that wraps up the formal part of the presentation. As usual, Adrian will moderate your questions if they have been sent through.

Yes. Thanks, Hugh. We've got a couple of questions. [Operator Instructions] So first question for Hugh. How goes the sale or return mix? And are you seeing better grocery engagement and also is shrink under control?

Look, I'll answer the last part first. Yes, we're happy with where waste sits. And I think it's always a barometer of the health of what we're doing in terms of if we're seeing our credit rate sort of go high, our view is that we're clearly making mistakes on either stock weight, ranging, pricing, product quality, et cetera, which obviously requires action. And if we're a little bit light, then our view is that we can push harder. So I'm happy with how our FY '25 waste rate finished across our sale or return network. And similarly, for our core stores as well, we do get all the data on core store waste, which sits with our customers across that store network, too. So we work hard on both fronts to minimize control and obviously seek opportunity to sell more product. In terms of mix, I think we've sort of quoted the stat on sort of our major customer network. We've moved from 26% to 29%. We obviously think there's more to be done on that front. But again, it comes back to customer willingness to make those changes. And I think we're in a good spot with our major customers to continue to make that move.

Next question. How has progress in new farms in China gone? And any risk of displacement of existing farms? And does the ROIC still stack up?

Look, I think as we highlighted probably last results or even sort of full year '24, we made good progress on locating and negotiating the front end of a fifth farm, but decided to pull back from that. So sitting here today, this is not something that we're pursuing. But at the right time in better market conditions, I think we will go down that path. But at the current time, we are, I suppose, making sort of final touches through our 2 remaining sites that have available space. So as we've already noted in the presentation today that we've added to our amaryllis production this year -- or sorry, in FY '25, we're finishing off an expansion to our tulip and Lilly footprint as we speak as well. So again, these are modest adjustments to our growing base. In terms of where we invest, right now, with rose pricing where it is, I would say to you that we wouldn't put additional capacity at work by virtue of that very question on ROIC. But with our bulb business, we are generating the targets that we're looking for. So yes, we're being careful based on the space we have available for construction and also our hurdles around CapEx and return expectations have not changed.

And next question, what have you assumed repricing in the Australian margin comments?

Look, I think we talk a lot about pricing in China because we are dealing with a farm gate price on products coming off the farms. Australia, we are dealing with a finished good or a value-added line item, whether it's base arrangements or straight in store. So pricing is less relevant in terms of attaining margin. So we have target margin rates on lines and all of our ranging decisions around pricing, et cetera, are all about margin maintenance. So in terms of what we've said around our EBITDA sort of margin expectations for the year ahead, I think we've clearly had a reset from the lows we experienced when we were having real challenges around freight and labor availability from '22 into '23. Our expectation is that further growth on a reasonably fixed cost base should lead to better margin translation. But again, we obviously be careful to say to you that rather than model a margin expansion into a growing business over the next 12 months, we prefer people to sort of focus on sort of achieving around that sort of double-digit or 10% margin rate in Australia.

The final question before we end the webinar. And when I think about this question, it's probably best put to the Board, but let me ask you anyway. So the question is bid price is materially below the IPO price. How was the price set? It seems opportunistic if confident in cycle as market dynamics don't seem to have changed? And what is the time line read of the bid?

Yes. Look, I won't comment necessarily on where it sits on a valuation range. I think we're obviously going through a process now where we'll have independent experts opine on that. I think we all have to recognize that the register that we have had since IPO has only become more concentrated. And I think liquidity in our stock has always been a challenge for us to activate new investors, et cetera, sort of to push a share price. So I think we have a bid on the table, which we want to take to shareholders to give them that option to vote on. So I can't say too much more than that. In terms of timetable, I think that's in the announcement. I think if everything goes to plan, we would aim to have the vote in the usual AGM slot in the last week of November off the top of my head with a view that things are settling in December.

Yes. I think the next step is a scheme booklet, which will happen in the next month or so. And I think it is -- I think there are some indicative dates included in the announcement today, followed by the required process culminating in the shareholder vote in November.

That's all. Thank you, Hugh and Steve. That ends the -- and for those that have joined the call, that ends the webinar, and enjoy the rest of your day.

Thanks, Adrian and all.