SHAPE Australia Corporation Limited (SHA) Earnings Call Transcript & Summary

Good morning, and welcome to SHAPE Australia's Investor Briefing. This morning, we have CEO, Peter Marix-Evans; and CFO, Scott Jamieson, talking to the Arden Group acquisition. There will be opportunity to ask questions at the end. [Operator Instructions]. Pete, I'll now pass to you.

Excellent. Thanks, Mel, and good morning, everyone. Thank you for joining us today. We've got a small slide deck. It's only 7 slides, so don't get worried that we're going to bore you with PowerPoint. And then there'll be, as Mel said, some time for Q&A as we go through. So we are very pleased to announce our agreement today to enter to buy the Arden Group, something that really attracted us to the business. We're very -- for those of you who have met us and talked to us before, we certainly -- we hire people based on character and culture, and we certainly surround ourselves with those sorts of partners, whether it be supply chain and acquisitions. So we chose Arden Group, a fantastic company, but also important to note that Arden did choose us. So Alan and Richard have run that business, some really successful business and built it into something that should be very proud of and certainly congratulate them on what they've done. So the -- so established in 2002, so Arden operates across 5 offices. So they actually operate across all of Australia, but with offices located in Sydney, Melbourne, Brisbane, Adelaide and Perth with a strong focus on retail and fuel fit out. So if you look at the SHAPE business, we've scaled across Australia, but we've also diversified whilst we still maintain a heavy focus on commercial interiors. We have scaled and diversified across other sectors. Retail certainly being a sector that we didn't have a strong footprint in. So it will certainly enable us to have a strong footprint in that, but particularly in the fuel retail where there tends to be longer-term contracts. So whilst the Arden income is not necessarily annuity, there's a number of longer-term contracts there with key national players. So delivering high-quality functional spaces, fuel convenience stores, corporate education, hospitality, there is also an ability to continue to scale that. Arden have sort of been very focused on their current market share. There's an ability to scale that out as well. And they certainly over the last 3, 4, 5 years, not moved away from the fuel retail, but certainly, again, diversified to have other sectors, including corporate education, hospitality and that sort of stuff. Arden do have a fair portion of their revenue, approximately 30% of their revenue from FY '25 in the FM. Again, those who follow the SHAPE story would understand that we have a division called Aftercare and Facilities Maintenance AFM. So this will again help us have a bit of a jump start in that area as well. And it's an area that we don't have a strong revenue base now. So this allows us to move more heavily into that. Experienced in-house trade team. So they do carry select skilled contractors, but they also subcontract a lot of the work out, again, similar to the SHAPE model. So whilst the sector is slightly different and an expansion of the SHAPE base, the risk profile, the project management style, the risk management framework that SHAPE have very easily blankets across the Arden Group as well. Average size of their projects is much smaller, $125,000, 250 to 300 projects a year. Again, if you look at the SHAPE business, our average project is $3 million, and we do 300 to 400 projects a year. So we're quite used to that high turnover. Our systems process risk management framework have been built to handle this type of stuff. And importantly, there's a large number of maintenance orders there, which are, again, small in nature. Given the smaller nature of those projects, typically, the gross margins are superior to that of the SHAPE BAU. And again, for those of you who sat through one of our SHAPE presentations, we talk about the SHAPE gross margins being 8% to 9%. When we have the modular, that's 15% to 20%. And then Arden Group, again, will be attracting margins at the upper range of that going forward. Strong alignment with the potential future growth potential and just really further enhances our ability to continue to be a leading national fitout and construction provider. We've talked there in the announcement, you would have seen the multiples based on a pro forma FY '26 of EBITDA. Revenue is a circa $50 million type range revenue for the business. And again, our SHAPE's ability to both enhance Arden and also Arden's ability to enhance SHAPE as synergistic and sort of [indiscernible] above. Anything else on that, Scott?

I think there's on the next few slides, we can probably cover [indiscernible] Yes. So part of the reason why we did choose Arden and similar to SHAPE, there's a lot of blue chip customers. So SHAPE as a lot of people do know that we sort of target the ASX 100, 200, which is actually not that dissimilar to the type of clientele that Arden have. So they do serve Australia's largest retail and corporate clients have done for over 20 years. Also, their top 10 clients have an average tenure of 10 years or more. So Again, very similar to SHAPE, a lot of repeat work. SHAPE operates in the space where we have about 85% of repeat work, which is not dissimilar to Arden. And one of the beautiful things about Arden, which we have spoken about before through part of our growth profile and any M&A activity that we would look to undertake was that annuity type income. And so Arden have a lot of -- they're on a lot of panels and they have a lot of 2- to 3-year type agreements or contracts. And what that also enables us to do is a lot of cross-selling opportunities, both from Arden to SHAPE and SHAPE back to Arden. So that will give us an opportunity to accelerate the growth of both businesses.

I think you can see there some of the logos on the screen. Really, they've surrounded themselves with blue-chip clients. That sort of tells you a little bit about the Arden Group and the type of business they are. Also the diversity across there, whilst we've talked about fuel retail, but you can look at again those logos and see that it's not just fuel retail. It's a really diversified business. Again, similar to the SHAPE business in that, that diversified portfolio allows the group to pivot to where the work is and to follow those rollouts even into councils and universities and that sort of stuff as well, which obviously have a lot of projects and a lot of built environment areas. So if you look there, our alignment with SHAPE's growth. So I have a proven track record for a long time of profitability and of growth, again, very similar to SHAPE. Large-scale facilities, maintenance and multisite, particularly in fuel retail as we say there, but that really bolts on to, again, our AFN business. Experienced team, nationwide reach. So the core team there, they have project managers, some in-house trades and support stuff, again, similar to SHAPE in our core sort of resource that we carry from a human resource is the project management side of things. Trusted nationwide network of specialist trade contractors. So again, because they've been doing it for so long and with clients with such repeat business, the same thing goes with the subcontractor base with, again, very similar DNA to SHAPE with strong relationships into the supply chain. Adding new markets we talked about earlier, which just SHAPE to expand into those retail markets, which we have operated in. We just -- we haven't geared ourselves up for that smaller multisite, including regional. So the Arden Group allows that logistical expertise in carrying out those regional works. Established management team will stay with the business. So the founding directors, both Alan and Richard will continue to lead the business from a day-to-day operations for at least the next couple of years. And the existing management team will continue to run the different various states and aspects of the corporate services. Strong relationships with their clients, very sticky relationships, which is, again, similar to the SHAPE DNA. And as Scott mentioned, the average tenure there is sort of 10% -- sorry, 10 years. Earnings profile. So we expect the business to be earnings accretive in the first year of ownership. And additional to the overall margin profile...

Yes, to add a little bit there. And again, those people that are familiar with the SHAPE story and have spoken to us over the years and our conversations in relation to acquisitions. One of the things that we always say that it must be is accretive from day 1, as Pete mentioned and also that the margins must be thicker than our BAU margins. So our BAU margins are circa sort of 8% to 9%. We've got some additional margins with modular, but the Arden business will provide margins of circa double or a little bit more than double the BAU margins that of SHAPE. And so we are expecting an EPS accretion of circa 10% to 14%. Obviously, that's subject to how the BAU business performs for SHAPE as well.

And that's just a little bit of an example of the types of work, whether it be commercial sort of retail rollout, service stations, food and beverage, that sort of stuff. So a very, very vast array of works. Again, good brands, Tier 1 brands and strong relationships that have been held for a long time. So the details that's without having to read that verbatim, that's all as part of the ASX announcement there. So $25 million upfront implied acquisition of 4x as a multiple from that point of view and the earn-out payable in cash, which would see the receive opportunity to receive a circa $7 million split over 2 years based on net profit performance going forward.

And the way that we're funding that acquisition, I know we've talked about a mixture of cash and debt, we will look to a $15 million debt facility and the remainder pay down in cash. I guess we're just adding a little bit more to that because I know that a lot of you know that we do carry a lot of cash on the balance sheet. And again, the reason that we do carry a lot of cash on the balance sheet is for certain prequalifications, external financial assessments, various ratios that we need to meet in order for us to position ourselves to undertake projects in excess of $100 million in a single contract point of view. So we do carry that level of cash, but we also do carry a little bit of excess cash and that excess cash is what we are using to fund the cash component of the acquisition.

That's the end of the slide deck. So we do have a few questions.

Yes. Pete, actually, I might -- we've got Abe from Shaw's who wanted to ask a question. So I'll just ask Abe first to ask his question.

Congrats on the transaction. I just have a few, I suppose, quick questions. Firstly, that $6-odd million EBITDA of the business, does that include any cost synergies? Or is that as a stand-alone business?

That's as a stand-alone business. And again, that's obviously, EBITDA comes before any funding costs. But yes, that's simply just a stand-alone business. So any of those sort of cross-selling opportunities, none of that's all been taken into account.

Are there any cost savings that you guys see in the business?

Right here right now, nothing has stood out to us as a material cost saving.

Understood. And can you give us a background regarding, I guess, revenue CAGR of Arden over the past 3 years?

Yes. So revenue has sort of been in the range of $40 million to $50 million over the last 3 years.

Understood. And just looking at, I suppose, a quick back of the calculation, if they're doing $50 million revenue, they have 80 people in the business, that's about $630,000 per person. Is there upside to that number towards SHAPE's, I suppose, $1.5 million per employee?

The main thing that drives the change in the increase in the per person revenue is primarily project size. There are efficiencies and things like that, that you can achieve to try and drive that. But for example, if you look at our New South Wales business compared to the rest of the country, the average project size in New South Wales is double that on the average project size across the whole country. And we're able to generate more per person in New South Wales because of that. So we're not going to see that significantly change unless the project size profile changes.

Yes. Got it. And then I suppose lastly from me, you've given us, I suppose, average project value duration. Just keen on the pipeline of tenders that Arden has.

So that will be -- a lot of the tenders, so they have a similar profile to SHAPE that they tender for work. It's often the difference with their is because of the long-term form MSA agreements. So for instance, some of those, whether it be [indiscernible], they go for 2, 3, 4, 5 years, and they normally have extensions on them. So the tendering is slightly different by way of a pipeline in that they don't necessarily have -- so for SHAPE business, they are larger projects with names for Arden, their programs with names, if that makes sense. So it largely depends on each year what CapEx is put aside for whether it be new stores, the maintenance aspect doesn't fluctuate as much. But you have things like, for instance, Liquorland changed their branding from red signage to black signage. So that's a CapEx that goes over 1.5 years. So it fluctuates a little bit. They just slight nuance to the SHAPE business, but the visibility of the program is very good.

Just a quick follow-up before I sign off. What proportion of the revenue is MSA driven?

Well, that's a good question, but it's more than 50%.

Also -- we have [indiscernible] here. So we'll ask [indiscernible] To ask a few questions.

Congratulations on getting this one away. It looks great. Just quickly, I just wanted to, I guess, dot the -- is across the Ts on some of the questions just before. Scott, you talked about revenue CAGR or revenue of sort of 40% to 50% recently. On -- on the EBITDA you provided is sort of suggesting EBITDA margins of about 13%, 14%. Is that correct? Or should we be sort of thinking about something -- a revenue number slightly higher for sort of '26 and '27?

Yes, circa 12% to 13%, -- subject to where revenues will finish, but in the vicinity of sort of 12% to 13% EBITDA.

EBITDA. And is there -- because of the facilities maintenance, is there a bit of -- and I know it's a smaller part of the business, but can you give us an indication on where D&A sits for this type of business, please?

So D&A, again, it depends on like how you treat the AASB 16. So from a plant and equipment point of view, it's fairly light. So you're looking in the vicinity of about $1.5 million of written down assets coming across, so not significant.

Okay. Got it. And more on the facilities business. What's -- how does -- what's the profile look like at the moment? And how do you go about winning work? We know how you go about winning work now with your CRM system and your ability to really drive the data. This looks like it's going to be a slightly different approach. And also, how quickly do you think you'll be able to lean into that facilities business? And use your existing customer base, I guess, to grow that? How quickly is it scalable, I guess, is the question?

It's probably similar to the SHAPE business from a scalability point of view in that the Arden team can only grow as quickly as they can hire good people. So similar to what we say for SHAPE. So circa 80 people. Certainly, there are clients that would like more of Arden. And I think the partnership with SHAPE will allow us to support that just even if it's back of house and assistance. We've got a team of recruiters of SHAPE and the back of house team that we have here with that support, allowing that growth. So the growth will be commensurate with the ability to hire good people. Something we would note certainly in the recent period that Arden have sort of made sure that have sort of added is to make sure that they've got that diversity, not just across fuel retail is a very big part of the business. It's been year-on-year, they spend money. It's evolved certainly with EVs. They haven't done a lot of EV rollouts yet, but that's all coming. And I know some of the major players are talking about that sort of stuff. So -- but again, the ability to grow will be linked back to the ability to hire those people.

Yes. Got it. And just interested on the -- just a bit more on the gross margin profile. I thought that retail in general was a lower gross margin business for you. How are we getting such strong margins? How are Arden getting such strong gross margins compared to you guys? And I mean you are sort of sector leaders in a way with what you do at the moment.

Yes. So the retail that SHAPE have traditionally done has not been multisite and regional. So our retail is somewhat limited to flagship stores and that sort of stuff. So it's larger fit-outs in larger buildings versus the margin profile or the book of Arden is smaller, more repetitive regional work. So it attracts a superior margin. And there also is the self-performance aspect of it that Arden do carry some of their own trades as well.

Right. Okay. So it's a slightly different profile to you guys as well. Okay. And what about -- can you talk about perhaps immediate opportunities? I mean, you guys run pretty fast. So like you'll already be looking at the opportunities you can leverage here. Can you give us an example of potential opportunities with this new platform that you can go after? And I guess, the potential size of contracts that you're looking at in the next 3 to 6 months?

So the next 3 to 6 months, a lot of those contracts are locked away because again, they are for contracts or MSAs across those brands. But if you think about things that Arden are not currently doing that SHAPE good leverage, there's certainly the defense aspect with the ability to be on base, there's maintenance aspects to that. And then you've also got our blue-chip ASX 100 base where if you think about the banks. The banks do multisite rollout. Yes, they're closing stores typically, but it cost money to close stores and to [indiscernible] as much as it does to centralize those sorts of things. So Arden are not necessarily heavily in those places. So there's certainly an ability to cross-sell across both businesses. Once we sort of -- again, we're not going in there to change what Arden do. They're a successful business over a number of years, and the team have been fantastic and will continue to. So we're going to be there to assist in that growth and also vice versa, Arden assisting us in our growth.

Last one. Thanks, Pete. When -- looking back, how has Arden rolling historically? Has it been through winning work, fit-out work and then being able to talk their way into a facilities contract? Or has it gone the opposite way?

I think it's a little bit of both. They're very, very strong relationships. So when we talk about -- obviously, we had a strong look at their MSA contracts and that sort of stuff. And both directors were very fluent with who's who in each of those Tier 1 global businesses. So those -- that strength of relationship over 20-plus years has been a big factor to it. They also -- whilst they don't necessarily have the same delivery platform that SHAPE have again, when we talk about what sort of defects they have and return to how they need to return to a project, they track all that and map all that. So they've got a really strong focus on customer experience and customer excellence, providing excellent customer service. So again, that really measures well with our DNA and our culture. So I think it's a little bit of all of those things. And obviously, they're one of the leading brands in the multisite retail rollout, and therefore, they make it on [indiscernible] as a default typically.

Okay. Sorry, one more. The trades you mentioned before, what do they have the majority -- like what are the main trades that they've got? Is there one particular -- or is there a broad church there of the trades that would be on balance sheet?

Predominantly electrical and plumbing. -- because they're the 2 areas that they'll have. So for instance, they might have an arrangement with a retailer that they will have a service level agreement where they'll have a trade there within 2 hours or full or that sort of stuff. Again, attracts higher margin, but it just that base level of trade so that they can -- and they surround themselves with a strong subcontractor base as well. But I think they just derisked their ability to service those agreements through having some of their own in-house trade.

Pete, we've had quite a few questions on the earn-out. Could you just chat to the financial targets as part of that earnout?