MaxiPARTS Limited (MXI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MaxiPARTS Limited Half Year '26 Financial Results. [Operator Instructions]. I would now like to hand the conference over to Mr. Peter Loimaranta, Managing Director and CEO. Please go ahead.

Thank you, and thank you, everyone, for taking the time, and we know what a very busy period for everyone. If we just jump to Page 2 of the slide deck, look, for those that might be new to MaxiPARTS and the call, we have 2 operating divisions within the business, MaxiPARTS, which is a truck and trailer spare parts business, and Forch Australia, which is a workshop consumables business. So as we get through the pack, we'll drill into each of those in a little bit more detail. If we jump to Slide 3, please, operator. Look, as an overview, it's really pleasing that we remain on track for our full year expectations, and we do expect to see a slightly stronger half 2 period as we start to get some immediate benefit from organic initiatives that we implemented in half 1 that had either a marginal or negative impact on the P&L and/or cash flow during that period. So, as a little bit of a market summary. Now obviously, market details are very hard to come by. So this is based on a combination of what we've seen in the market. We certainly saw activity increase and improve across the period. So quarter 2 was certainly stronger than quarter 1, which is a positive trend. We have still seen inconsistencies in various geographical markets, as we saw in FY'25. But at this point in time, we are seeing a stronger Queensland and Western Australian business and marketplace. We did start to see some reasonable recovery through Victoria during the period. South Australia and Northern Territory businesses remained fairly consistent, and we're still seeing the New South Wales market overall being reasonably difficult. In terms of market pricing, we have called out that we continue to see pockets of aggressive activity from competitors. That's no different from what we saw in FY '25. We'll obviously go through details around key achievements as we get into it, but we certainly want to call out that we have increased the interim dividend by 36%. That's a combination of both marginally improved financial results as well as a change of dividend distribution policy, which we communicated our intentions to the market at the AGM in November. We did start a new greenfield site in Kalgoorlie in Western Australia. That's commenced trading at the end of July. It's been a remarkable introduction for a business. It reached profitability or breakeven point in September, and we're continuing to see strong growth from that particular initiative. We continue to focus on our Japanese product segment and certainly saw that grow at levels greater than 15% year-on-year in the half. Although we had previously announced the completion of the Force business or the acquisition of the remaining Force business, that did happen in July, and linked into a further extension of the Forge Australia distribution agreement we have out to 2032. And we certainly have implemented an increase in the direct sales team from Forch. We'll talk about outlook at the end, but in terms of our expectations for half 2, we do expect to see an improvement in cash conversion and net debt. Half 1, we had some investments in Forch, and investments in inventory. So we expect to see a return to our traditional levels in terms of cash conversion. We expect to see improvement in both revenue growth rates as well as EBITDA profit margins as we continue to get benefits from both the Kalgoorlie project as well as the Forch Australia additional sales team expansions. With that, if we jump to Slide 4, the financial highlights, then look, as we put in the highlight there, consistent results with both profit and cash reflecting investments in organic initiatives that we made in half 1 that we expect to have a short-term and longer-term benefit as we work through half 2 and into future financial years. So our revenue, our EBITDA result, and our net profit before tax from continued operations all saw positive improvement on the prior period. Our EBITDA margins maintained 10%, which was consistent with FY'25 despite the slightly negative short-term impacts of some of those organic initiatives. We did see operating cash come back slightly, and our net debt reduced slightly. However, our leverage ratio and net debt remain at a very conservative level. But that cash impact was obviously a result of investment in inventory, setup of Kalgoorlie, as well as the final completion of the Forch Australian acquisition that we had in July. In terms of earnings per share, we saw an improvement of 8.8% on the prior year. And as I mentioned at the start, we did lift our dividend payout ratio to see the interim dividend of $4.015 per share fully franked, which was a 36% increase on the prior interim dividend. So with that, I'll hand over to Liz to run through a little bit more about the detailed financials.

Excellent. Thanks, Peter. If we can just move to Page 6, please, and I'll take you through the group profit and loss to start with. At the revenue line, we had revenue for the period of $139.3 million. That was up $2.4 million or 1.8%. The revenue growth there was driven by the organic project, which Peter has given a little bit of flavor on already and was also partly offset by volume changes across key customer accounts. Looking at the EBITDA line, $13.9 million for the period, again, slightly up $0.1 million or 0% and EBIT of 10%, consistent with the prior period. [Technical difficulties] Positive maintaining margins of 10% in the fact that this includes the setup and site in MaxiPARTS as well as staff costs in remains delivering EBITDA margins over [indiscernible] short through a combination of pricing discipline and gross profit margin benefit to do with product mix on Japanese, for example, and a continued focus of the group. The net profit before tax line on the P&L, the group achieved $6. [indiscernible] million for the period, slightly up $0.1 million prior period. Net profit after tax from operations was million, up $5.3 million, or from the prior. We reported a profit of $3.6 million, slightly down $2 million briefly call out a negative there, just calling that out noncash FY'25 true-up entry that has come through the results this period. We've put more detail in the accounts on that. If we can please move to Page 7. Where we've got the balance sheet for the group. The main callout, which Peter touched on was the investment in working capital for the period to support the organic growth initiatives. So, looking at the working capital increased by $4.6 million in the half, reflective of investment in inventory across the MaxiPARTS network to support the new store in Kalgoorlie and growth in key customer accounts across the network. Additionally, we do see a seasonal increase in inventory at the half year compared with the full year position. Other call-outs on the balance sheet, deferred tax asset line of $6.4 million. That includes $4.7 million of income tax losses carried forward. The financial liability is now nil. It was $2.2 million at the end of the FY '25 period, which was the remaining 20% ownership stake in Forch, which we funded from cash during the period completed in July. And net debt position for the group, net debt position of $8.7 million at the end of the half. That was an increase in net debt of $1.5 million over the period, reflecting the increased working capital position for the group, along with the buyout of the final 20% of Forch Australia. If we can please move to Slide 8. Look, the cash flow, the main story there, the gross operating cash conversion of 65% in H1 prior to halves were 80% and 88%. The call out there, again, is the cash invested in inventory in H1, and then we do expect to see cash conversion rates returning to 80% plus in H2. Other items there of note, the interest line, you'll see a slight reduction in the interest versus prior comparative period. That's a result of reduced rates and the fee structure on our main debt facility. Taking a quick look at the CapEx line, $0.7 million spend in CapEx for the period. That reflects just sustaining CapEx across the network as well as a little partial costs associated with the site expansion in Kalgoorlie. And you can see in the financing activities, the $2.2 million for the remaining 20% interest in Forch Australia, again, funded from cash during the period. I'll move to Slide 9, to the capital management. Again, very pleased to be announcing a fully franked interim dividend of $0.0415 per share declared for the period, the interim dividend being up 36% on the prior period. As Peter made mention of, that reflects a payout ratio lift from 40% to 50% of group profits. That was communicated during the announcements that we made through the Annual General Meeting back in November. Looking at the debt funding, very much consistent from where we left it close of FY '25, total borrowing facility of $28 million with a utilization ratio of 80% at present and the leverage ratio of 0.3x is well below the group's capital management threshold. Looking at free cash flow for the period, the business expects to remain CapEx light, as you've seen in the half year and preceding periods. Expect our free cash flow to be used towards reducing drawn debt over half 2 as well as the continuation of enabling the higher dividend distribution. On that note, I'll hand back to Peter to take you through a little bit more flavor in the business unit updates.

Thanks, Liz. Look, if we just jump to Page 11, there's just a brief outline of the MaxiPARTS operations business. So, as you can see there, really strong footprint on a national basis. We operate from 30 different stores under the MaxiPARTS banner. We are a distributor of both leading brands as well as having our own private brand product labels in the commercial vehicle space. We're certainly one of the largest importers of aftermarket commercial vehicles in Australia. We also operate a large driveline rebuild workshop in Western Australia, 162,000 parts available with 20,000 online. So, if we jump to Slide 12, obviously, a bit more detail about the MaxiPARTS segment that we operate. So, as you can see from the financial table, some positive improvement on the prior period. It was pleasing to see the EBITDA margins lift even though we did implement the greenfield store as we referenced before. Previously, we have communicated what an underlying revenue growth rate would look like if we stripped out the previous sales to the trailer business that we sold in 2021, or the prior year saw the last of the revenue streams linked to that particular business in the first half. So, if that was stripped out, the MaxiPARTS operations business saw a 2.6% like-for-like underlying revenue growth rate on the prior year. We've touched on most of the highlights sitting in there about Kalgoorlie or Japanese growth, but it is certainly worth highlighting we also saw significant growth. There is  a little bit of market improvement, but certainly, there were some key customer wins and rollouts that drove region during the period that we would expect to continue to see in half 2. In terms of areas we're focusing on, are still actively working with key customers on transitioning further revenue through that particular site. So, we expect that to continue to grow. It will have a normal profit profile obviously, half 1 was impacted by start-up costs, et cetera, in the first month or 2 of trading. It has a really strong profit contribution profile still seeing further customer acquisitions and additional customer-specific site rollouts [Technical Difficulty]. We continue to focus on the Japanese product range. And as we've talked about particular segment of our business to continue to grow in double-digit levels and continue to grow for a number of Inventory optimization to drive further cash improvements. We remain committed to a disciplined pricing and margin strategy despite some of the competitive pressures in the marketplace. [Technical Difficulty]. Our customer inventory management system or Maxi stock. [Technical Difficulty], project to accelerate product data and cataloging, which we think will have some for the structure of our business. If we jump to Page 13 and the fourth slide, then once again, an overview of the business. We stock about 10,000 different parts in Australia. We operate this business from 3 different strategically located warehouses in Perth, Brisbane and Melbourne. It has a different customer needs. So being consumables that are generally stocked, there isn't the just-in-time need that the MaxiPARTS business has. So we don't envisage further investments in sites to support this business. We are growing the national sales team that will continue to grow in future periods. And it's certainly a business that has a significant growth profile as we put there. Largest competitor is north of $185 million a year in revenue in Australia. Obviously, we expect to be over $20 million this year, but certainly, a lot of market gain we expect to see come through that business. And a bit like Japanese, not a period story, it will be continuing to benefit the business for a number of different periods. We jump to Slide 14. Once again, the financial data is there. We did see the revenue target being slightly under what we anticipated in terms of low double digits, not overly material, but certainly something we expect to catch up as we come into half 2. We did see a slight reduction in EBITDA margins. Obviously, the scale of this business means it is highly sensitive to short-term investments and movements. So although the investments in staffing weren't as dramatic as we made a few years ago. It certainly was still enough to combine with some other operational consolidation pieces to see a minor reduction in EBITDA margins. However, it's still maintained at a level above the traditional MaxiPARTS business. So look, as we move forward with the Forch business, we certainly expect to see a revenue lift from the natural maturity cycle of the expanded sales teams. We're continuing to see benefits in the sales planning and call cycle management from the CRM system that we implemented at the end of FY '25. We expect also to see margin improvement, both as a benefit of scale increase, but also we did implement some pricing adjustments towards the end of half 1 that we expect to give some benefit coming into half 2 and future years. We continue to work on getting efficiencies through warehousing, freight and supply chain projects, and we've certainly got a continued project of getting synergies with MaxiPARTS, whether that be expanding the core product offering to MaxiPARTS stores. We've got a joint trade store pilot program in Truganina, and we're certainly continuing to have the businesses work together to target key customer rollouts. So with that, if we jump to the outlook on Page 16. Once again, fairly consistent with what we've communicated in previous reporting periods, whether that be at the AGM or the full year. So at this stage, we expect the market to continue through of what we saw in half 1. That has certainly some stronger geographical segments. It does still have some inconsistency that sits in there. We do maintain and extremely confident of reaching the full year market expectations that were set. We do expect to see both revenue and profit improvement flow through in half 2 versus half 1. They will come from that Kalgoorlie store profile, which obviously has a normal profit profile, but also a continuing higher level of growth at the revenue line in half 2 and into future periods. We continue to see benefits, and we expect to see further benefits from key customer expansion projects as well as the continued growth of the Japanese parts business, which parts segment does operate at traditionally high traditional MaxiPARTS. So like Forch, a higher growth profile with a higher average margin driving some incremental improvements to the average group's margins as we move forward. We talked about Forch, so we do expect to see revenue and margin uplift in half 2 as a result of the expanded sales team. As Liz mentioned, we did make investments in Kalgoorlie and inventory in half 1. We do expect our cash conversion rates to return to above 80% levels in half 2. And that stronger cash generation will certainly allow us to pay down further debt repayments, which once again will link into reduced interest profile for the business as well as enabling us to sustain the high dividend distribution rates that we recently implemented. We don't see any abnormal CapEx or investment projects coming through in half 2. So with that, I'll hand back to the operator to take any questions.

[Operator Instructions] The first question comes from Warren Jeffries with Canaccord Genuity.

Congrats on good results. Just quickly on Forch, what's the headcount uplift there that you're talking about? And how late in the period did they become appointed?

Yes. Look, it was only 4 heads, Warren, which is about 10% of that workforce. So not overly significant. They did come in at various stages in the period. So it wasn't at once. They started at the end of the financial year with the most recent one coming in November, early December.

I think there was an expectation that margin at some stage would be a 20% margin. Is that still the ultimate goal there? And will that come with scale and leveraging the workforce?

Yes. It certainly will improve. We probably expect it to be more mid-teens as we continue to pursue a higher growth profile. So as we continue to add people in the sensitivity of that business will reduce a little bit, which should see the medium-term margin sitting sort of mid-15s. And then, look, as there is scale and as it becomes more of a traditional profile, there's certainly opportunity to see that lift further up towards the 20% profile that you mentioned.

Just jumping around a little bit as well. Just the broader market at the moment, you've given us a good bit of detail there on the geographies where things are strong. Recovery starting to be seen in Victoria, is that now muted again a bit more? Or is that still sort of grinding upwards into a better environment?

No look, yes, generally, we see the market has improved over the financial year. So as we said, certainly, quarter 2 was higher than quarter 1. December, January are quite hard periods to get a gauge on given the holidays and the shutdown of key customers, but we certainly haven't seen anything that see us changing a view of a slowly improving marketplace. We certainly think the medium to normal market level is certainly a little bit stronger than what we've seen in the last 18 months to 24 months. Exactly when it normalizes, yet to be seen, but we certainly have seen some positive signs of the market over the last 6 months.

[Operator Instructions] There are no further phone questions at this time. I'll now hand it back to Mr. Loimaranta for closing remarks. Please go ahead.

Excellent. Thank you. Once again, thank you all for making the time. Look, as hopefully, you've gotten a feel, we are quite pleased with where we got to with half 1. We did intentionally make some strategic investments that had a short-term negative or very small improvements. Certainly, the success we're seeing through Kalgoorlie is extremely pleasing, and we expect that to drive some strong benefits through half 2 and in the future years. Likewise, the key growth projects in terms of Japanese parts and Forch, we expect to continue to drive improvement through the business. So thank you for your time. We do understand it's a very busy cycle. So thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.