Peoplein Limited (PPE) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining the investor call for our first half results for 2020. Today, I propose to run through the presentation, which we've just released to the ASX. Apologies, we had a few technical issues getting it uploaded, but it should be up there now for all to see and to have a look at. So I propose to run through that presentation. And as the operator said, we'll take some questions at the end. So just, I guess, starting on Slide 5, talking about the highlights for the half. Very happy with the performance of the business over the last 6 months. It's really been a continuation of the performance that we've been generating over the last few years with the various pillars in our business continuing to perform quite well. Our strategy of really focusing on the niches where -- in the market where we've got a clear point of difference to our competitors continues to play out well for us. We've been able to successfully drive our sales line, maintain our margins, which are good margins at the gross profit level, and that's flowed through to increased profitability across the business. Once again, most of the growth is coming from the health and community services sector. It had another strong half. Both the nursing and disability focused or community services business continue to perform well. The IT business continues to perform well also. As an industry, the IT industry has been very strong. We're very well positioned in that industry. The acquisition of Halcyon Knights that we completed in May of last year expanded our presence into the sector and has performed well for us. In terms of just talking more broadly about our acquisition strategy and how that's been performing, we've been very happy with the acquisitions that we completed. When I look back on the last 6 months, it was really a half where we are focused on bedding down some of the acquisitions, some of the more recent acquisitions that we've made. Those ones being Halcyon Knights, First Choice Care and Carestaff in the health care sector. Those 3 deals have done well. They're all performing either at or slightly above expectations for the half, and we're happy with how they have been integrated into the business. I think the more time we're spending with those businesses, in particular, and as we progress even further that integration, we're seeing even more opportunities to drive increased business, potentially more than what we originally underwrote going into the transaction. So -- and that was really our focus for the last 6 months is really making sure -- from a strategic perspective is making sure those acquisitions were better done. Looking forward and at the end of the presentation, I'll give some insights into where we see the opportunities over the course of the next 12 months, but there's more acquisition or strategic opportunities that we have started to review and are optimistic around what transactions might occur in the future. In terms of what the numbers look like, so our revenue grew by 45% from $134 million to $195 million. Our normalized EBITDA grew from $8.4 million to $12.9 million, which was a particularly good result, we thought. In particular, our EBITDA margin continued to increase. So the strategy that we've been talking about over a number of years of focusing on areas where we've got a point of difference, so we can generate higher margins is really playing out for us as well as a relentless focus on our processes, making sure that we're as efficient as possible and in that way, driving bottom line growth. So EBITDA margin increased from 6.3% to 6.6%. Our NPATA, given the large amount of amortization that we have in our P&L due to some of the acquisitions we have made, we add back the amortization to reflect something more consistent with what we believe to be the real profitability of business. And that grew by 49% for the half, which is a strong result. And the NPATA per share grew from $0.094 to $0.125 for the half. Net debt increased to $28.4 million. We completed the acquisition of First Choice Care in the half. And so that had a fairly material impact on the net debt level. That being said, it still sits at approximately 1.1x annualized EBITDA. By annualized, I mean, if you take the first half and you multiply that to for a full year result, so it's still a fairly conservative level of gearing. Page 7, got a graphic to show the continual growth in the business over time, particularly happy around, obviously, the growth in more immediate times but also just the consistency of that growth over a number of years. Now that we've been a public listed company for a number of years, it's nice to be able to demonstrate in the public market not just in the private market how we can consistently grow the earnings in the business and most importantly, the earnings per share. Just on Page 8, just an update on what the business split looks like. Health and community care is now just over half of our business; information and technology, 22% of our business; general staffing, 15%; and specialist services, 12%. So once again, we've been growing that health and community care part of our business. Our expectation is over the long-term that, that will grow to be approximately 3/4 of our business, and the trajectory is clearly in that direction. Just in terms of the division breakdown, starting at health and community services. I won't talk too much about the -- our current competitive positioning or the market dynamics because I've been through that previously but focus more on the strategic growth initiatives for each of the different sectors. So with health and community care, a number of strategic initiatives going on in that business to continue to drive growth in the market. And what I've done here is pull out the main ones or the more material ones, which are going to significantly impact the business, we hope. The first is the launch and the initial rollout of the home care business. So as you're all aware, we're the largest provider of casual workers in the caring space to residential facilities across Australia. But we -- historically, we haven't done much work in the home care sector. That's a massive market. There's a number of players in that sector that do incredibly well. And the secret to being successful in that sector is to have a really good control of the workforce, which is something that we've already got through our existing business. So we've launched that business. We're rolling it out. We're looking to grow it. We're particularly excited as to where we think that business can go. We think it can be at least as big as, if not bigger than, our existing community care business over the medium to longer term. It's a sector of the market that's getting a lot of support from both the government and from insurance companies in terms of treating people in their homes. And clearly, directionally, that's the way that health is going to continue to -- health care is going to be continued to be practiced in the future. With respect to the nursing businesses, we have been busy integrating those businesses, and there's a number of initiatives that went on during the first half to bring them all together. That's gone particularly well. We're seeing a lot of opportunities where some of the parts will be -- generate more than what the individual businesses generate. There's -- it's helping us attract better staff. It's helping us attract more talent and more nurses and being able to utilize our existing nurses in different markets. It's leveraging our marketing capabilities across a bigger business. It's leveraging our management capabilities across a bigger business. So for a number of reasons, that's working really well for us. Improvement to back office systems. And this is a theme across each of the different pillars, constantly focused on the processes that we've got in place, making sure that we're doing things as efficiently as possible, servicing the customers as effectively as possible and doing it as cheaply as possible from our perspective without sacrificing quality. Continued investment in marketing and talent sourcing. With respect to the health and community care business, we traditionally haven't spent a lot of money on marketing. We've relied more on word of mouth than brand recognition. And that's been great, been able to grow the business quite successful with that -- successfully with that. But there's a lot of opportunities that I think we're missing out that there's -- and so we've been very focused on, okay, by investing in marketing, what return on investment can we get from that? And I think there's some low-hanging fruit with respect to some of the things that we're looking at there. We've had some success in national tendering. There's some stuff going on over the next 6 months where some larger national tenders. Now that we've got a NPATA, not a national footprint, but certainly an Eastern seaboard footprint in the nursing space, at least. And in the community services space, we've got a national footprint. We've had some success there. And then finally, with respect to some strategic opportunities, we have -- we continue to review opportunities, whether that be specific niches in the nursing sector, opportunities in the home care sector or geographies or regions where we're not currently in. We're looking at opportunities there, and we're quite excited around some of the things that are in front of us at the moment. Just moving on to information technology. So once again, focusing more on the strategic initiatives. Between our 3 brands in that space being Halcyon Knights, Recon and Project Partners, we've certainly got a sizable business now we're one of the larger Australian-owned IT providers -- IT service providers. And so we're really trying to leverage that strong position in the market to continue to grow. The first thing we've been focused on is actually integrating those 3 businesses to make sure they're all working off the one platform. So that's been going really well. That -- it's good for the people in the business. It's good for clients where we're coming across an integrated business, good for candidates. So that's been working well and will continue in the future. We launched an office in Sydney, which is exciting for us to think that we're as big as we are without having a physical presence in Sydney historically, just creates a great opportunity for us. So really excited about the people we've got onboard down there, driving that business for us. And I expect that, that will be a meaningful contributor, not this year but definitely next financial year. Further investments in operations and systems to support the scalability of that business is something that's continually ongoing. Increased growth in the consulting business through cross-selling into our recruitment client network is something that's working for us, although it's only early stages. So we're getting a bit more programmatic and focused on generating more cross-selling opportunities. And we are looking at some smaller strategic acquisitions to the extent that we think they're a good fit with that existing business and the circumstances and the pricing fit well with what we're doing in that business. Third pillar, being general staffing and specialist services. Once again, just to focus on the strategic initiatives for this year. Firstly, the rollout of improved systems to facilitate more efficient processes. We've been upgrading our systems for an extended period of time, and that's being implemented successfully over the last 6 months. So excited around the impact that has on a number of levels. The product and the quality of the product and our offering to customers has been enhanced, which is fantastic, to help us create a point of difference versus our competition. And secondly, just streamlining our processes to make sure we're as efficient as possible and getting the best return on our investment. Investment in specialist services businesses is continuing. Those businesses continue to grow quite well. And by these businesses, I'm referring to the contract planning business, facilities maintenance business, the early child with education, the payrolling business. They have got their own middle niches. They are performing well and in their own right of becoming stand-alone important generators of income to us. So we continue to focus on how we can improve those businesses and continue to grow them. And then finally -- sorry, on the -- one point to note, I think, is on the general staffing business. There is a focus on margins in that sector at the moment. It is more competitive. And so we're increasingly focused on making sure that we're not sacrificing our bottom line margins. So making sure our processes are as streamlined as possible. There are certain opportunities that we have looked at in that space, more in the specialist services, where you're really leveraging your capabilities around workforce and human capital into businesses that are slightly adjacent to that, whether that be more HR-related services that have been outsourced or related businesses. Nothing too immediate there, but it's a sector that we continue to review to see whether there are other adult products that are really consistent with what we're providing at the moment that we could sell into our existing client base. Moving on to the financials. So I touched on the numbers upfront. You can sort of see a slightly more detailed description there on Page 14. Growth in the existing businesses continues to come through, and the positive contribution from the acquisitions driving the significant growth in the first half of 2020. On Slide 15, we've got a graph of our EBITDA margins over time. This is something that, you'll recall, going back 3-or-so years ago at the time of listing, it was definitely an area of focus. We always believe that we could continue to grow our margins, even though there already some of the -- certainly, some of the leading margins in Australia or even globally in terms of listed companies in the sector, whether we've got the third-highest EBITDA margin, which is I think really testament, once again, to that strategy, where we're focusing on niches that generate higher margins and also very focused on what our processes are, make sure we've got the right technology, backing up our business to support our business in the most efficient and cost-effective manner. So happy to see that the margins grow to 6.6% for the first half, and we will continue to focus on that in the future. On to the balance sheet. Net debt of $28.5 million, so approximately 1.1x EBITDA. That's a normalized net debt number. So we take out the change -- the account -- the change to the accounting standards around the treatment of leases. You'll recall, we take that out of the calculation of net debt to make it consistent with prior periods. From a cash flow perspective, for the first half, we generated only $2.5 million, which is less than probably what would normally be expected. To put some context around that, there was approximately $2 million in tax payments, which related to the acquisitions that we have made. And it was taxes owed for periods prior to us buying those businesses is something that we knew in negotiating the price and how the deal was structured and the working capital that we acquired effectively or the liabilities that we acquired as part of those deals. And the other thing, I guess, that happened December 31 can be a tricky time when it comes to collections. And we've seen in January a really strong bounce back in cash flow -- operating cash flow, which I think sort of reflected that -- December 31 was a tough time for collections, just given the Christmas, New Year time of the year. So definitely, for the second half of the year, expecting a much higher level of operating cash flow. Interim dividend, we've kept it $0.04 per share, consistent with last year. When we get to the end of the year, we'll review our total profit for the year and adjust the final dividend accordingly to be consistent with the guidance that we've given to the market. Just turning to the outlook for 2020. So look, I think we've -- I think it's been a great start to the financial year. Very happy with the performance of the business. But there's still a hell of a lot more that we can do, both in the short term and in the longer term as well. So just running through some of those initiatives that we've got on at the moment. First one is just, at the moment, we've grown -- we've effectively doubled the size of the business in a couple of years, and we think it's prudent to re-purpose our vision and our purpose and values to align with where the company is now and what the growth of the company looks like. So that's a process we're going through at the moment, which we're excited about, all the people in the business excited about and revising upwards what our expectations are with respect to our 5-year plan. The second thing is investing more management focus in organic opportunities to continue to drive strong growth across the business over the medium to long term. The beauty, I think, of having strong performance, it enables you to continue to invest. We've made some key hires, brought some good people into the business that we think can be additive to the business over the medium to long term. And we'll continue to do that. Also, we've enabled a separate People Infrastructure budget allocation to support new organic growth opportunities. It's good to separate it out from people's divisions to encourage people to put forward new opportunities that the head office effectively will fund. The idea that there'll be a 6-month breakeven on those opportunities and then a positive medium- and long-term contribution, we've put that in place about 9 months ago. It's gone really well. And that's -- you can see some of these categories of things that it's funded. It's funded the investment in the Sydney IT office, investment in the Sydney business for our -- the Sydney branch for our Tribe business, the home care business and also an offering of perm services across the broader company. So there's a number of organic growth opportunities that are going on in the business that we're excited about. Increasing our investment in marketing across the group is something else that I mentioned specifically for the health care area, but we're broadening that across the group, which we're excited about the -- what upside that will bring to our business. And then there's all the division strategic initiatives that I went through. So that's what's going on from an organic growth perspective, particularly a lot of excitement and energy and anticipation really across the business where everyone is kind of tremendously excited around what we've been able to achieve but also what the next 5 years look like for us. On the acquisition pipeline, very happy that the deals that we've completed, the companies that we bought have performed well. They've integrated really well. And I think in talking to the people and seeing the results in those businesses, I think there's -- let's just say that we're perceived to be a very good home, and the people that have come across as part of those businesses, I think, are particularly excited around being part of the broader People Infrastructure offering, which has been great. So we're looking at a number of other opportunities, which are supportive of our strategy. There's various opportunities that we're currently on due diligence on at the moment. So we are excited around what that could mean for the short to medium term. So that's really it. That's a summary of first half. Happy with the results. And now, operator, happy to take any questions, if anyone's got any on the line.

[Operator Instructions] We have multiple questions in queue. Our first question is from Mr. David McFadyen from Petra Capital.

Declan, obviously, it's clear that the NDIS funding is all coming through, and it's sort of driving some of that earnings uplift that we're seeing. Do you have any feedback on how providers and participants are sort of navigating the new payment structure? How they're sort of viewing everything where PPE slots into that? Do you have any sort of, basically, just more information from the last few months?

Yes. I mean look, I think, anecdotally, there was this period of indigestion, right, where everyone was kind of getting used to the new system and how it operated and the change in the funding from -- coming from the not for profits to coming -- going directly to the individuals. The ones that have received the funding have sort of worked through that now. So it seems to be operating quite smoothly. There's still a backlog of people still haven't been assessed, and that's probably what you read about in the newspapers from time to time. And so that's still coming through. So those assessments will be ongoing. There's also a fair bit of noise out there in the press around the inadequacy, I think, of some of the funding coming through or some of the limitations on how that funding is structured. But I think that that's really noise. It's a real distraction from the fact that the sector is getting funded to the extent of 3x what it was getting funded prior to the NDIS coming in. So there's a whole lot more funding going into the sector at the moment. And generally, that's been received by individuals out in the community as a huge positive.

Okay. Sorry. And one more quick question. Do you have anything further on the aged care sort of longer-term opportunity?

Yes. So it's something that -- and we didn't -- and coming up with kind of the organic opportunities we're focused on, I had -- I was trying to sort of cut it down to a manageable handful, but that's also one of the key opportunities that we've been working on and continues to come through. Some of the larger national tenders that we've been working on have been related to aged care. And the home care opportunity, in particular, that we're looking at is not just disability-focused; it's also very much aged care-focused. So even though I didn't specifically mention, the aged care is a big component of that organic growth opportunity for us.

[Operator Instructions] Our next question in queue is from Mr. [ Ben Rodney ] from Morgans Financial.

Okay. Declan, just a couple from me. Congratulations on a strong result. The first one is just with regards to your net debt position at 1.1x EBITDA. So just to confirm, is that including your lease liabilities or your lease liabilities on top of that? And secondly, where would you be comfortable to take that to -- for in -- for an acquisition?

Yes. So no, I've stripped out the lease liabilities from that spend. So that's excluding the lease liabilities. Where would we be happy to go with that? Previously, I've sort of indicated up towards 1.5x seems like a level that we can comfortably service and doesn't create any risk on the balance sheet. So I think that's somewhere around 1.5, 1.75x, probably as much as we would stretch to.

Okay. But it sounds like, yes, you've got a few opportunities in the wings there, so it will be interesting to see those. Second question, just on -- you mentioned you called out marketing. You haven't really spent too much in the past, and you will be targeting that health care area, which seems to be, as you mentioned, the direction of where health care is going into the home. What kind of spend can we expect there? And are you using digital mediums to target that? Or what does that look like?

It's probably a really long answer to that question. What's our marketing strategy sort of look like, right? It's -- in terms of how we're going to -- how much it's going to cost and what the spend sort of looks like, we're not talking huge amounts, right? And more than anything, it's really in the personnel that are going to deliver the marketing strategy for us as opposed to the cost that's going to go on actual marketing, right? So -- and we've already -- that spend has already been coming through in the last 6 months where we've hired people -- marketing people into the business and had some marketing consultants engaged on some initiatives for us. What that sort of looks like? Look, it's -- so in the IT -- just going pillar by pillar, in the IT sector, we've got -- we've been doing marketing there for a long time, right? So that's -- we're not talking about that sector. Health and community care, it's -- for us, it's more focused on sort of 2 areas. One is it's on sourcing talent, right? So not so much clients but sourcing talent. So using -- going through digital channels, building our social media and online presence to source more people and also kind of working our partner relationships with things like IPOs to make sure that we're increasing our catchment of people. That's sort of the main focus there. In the home care part of the business, there's marketing that will be going on to people with packages. And then on the general staffing and specialist services part of the business, once again, that's more with respect to marketing people in our business to assist in the -- coming up with the strategies, sort of enhancing the strategies that we've been using previously and assisting with the execution. Just as a growing business, we think we've now got the scale where you can afford to invest in the resources and get a return from that investment.