Adrad Holdings Limited (AHL) Earnings Call Transcript & Summary

Good morning, and welcome to the Adrad Holdings -- good afternoon, sorry, and welcome to the Adrad Holdings Half Year FY '24 Results Webinar for the period ending 31 December 2023. Presenting today is Adrad's CEO, Darryl Abotomey; and CFO, Rod Hyslop. Today's format will have the team run through the results presentation followed by a Q&A session. A reminder to all investors that you can enter your questions at the bottom of the screen. I'll now pass to Darryl.

Thanks, Mel. Good afternoon, everyone, and thanks for joining Rod and myself for the Adrad Holdings Limited Results Presentation for the 6 months the 31st December 2023. The AHL results were announced on the ASX website this morning and are available there and also on the Adrad website. We'll be walking through the presentation, so all page references relate to the presentation. We're very pleased to be able to report on these results, which are positive in all aspects of the business. I'll go through the highlights and segment achievements. Rod will go into the financials, and I'll then cover the growth initiatives and outlook. So let's get into it on Slide 4. So AHL's vision is to be the first choice for industrial and engine cooling solutions. This is done by the 2 business segments of Heat Transfer Solutions, trading as Air Radiators and Adrad Distribution. Slide 6 shows the operational highlights for the 6 months with revenue and earnings increasing at all levels and across both segments, along with strong cash flow. We have now implemented the organization structure with a focus on the 2 businesses and with clear accountability and support functions. And we have progressed well on the group strategy, which I'll cover a bit later. In Heat Transfer Solutions, we have made progress on closing plants to improve efficiency and reduce duplication. The Thailand facility production building expansion has been completed with new machinery now arriving and being commissioned. Development of heavy-duty aluminum radiators has progressed as well as the development of Alu Fin, both in hydrogen fuel cell applications and for battery/electric cooling in mining vehicles. In Adrad Distribution, we increased the utilization of the network that was expanded in 2022, reduced inventory levels and improved margins and introduced new product ranges. All of these operational highlights led to the results shown on Slide 7, with revenue increasing 7.6% to $73.5 million, which was at the top end of the range we had indicated and pro-forma EBITDA was up 8.4% to $9.9 million, which was above the range we had indicated. Also, statutory net profit after tax was up 66% to $3.1 million. Cash flow from operations was extremely strong at $11.1 million, which included $4.7 million or almost 9% reduction in inventory through better inventory management. The group also declared a $1.33 per share dividend, fully franked, which represents 35% of net profit after tax. On Slide 8 shows more details of the revenue and earnings, both in pro-forma and in statutory, noting that in the prior period, statutory results contained the IPO and items not associated with the ongoing business. And turning to Slide 10. This shows the split of the results between segments with both segments delivering solid increases in both revenue and EBITDA. The increased revenue and earnings arise from strong powergen cooling package demand, especially in on-highway and industrial products and Adrad Distribution growth in revenue while utilizing existing network infrastructure. Now looking at the highlights for each segment. We'll firstly go to Heat Transfer Solutions on Slide 11. I've already mentioned the progress in Thailand manufacturing plant with buildings and machinery, so I won't repeat that. There is a growing demand for the backup systems for data centers and on-highway original equipment radiators. The Alu Fin applications continue to increase with both batteries, electric cooling and hydrogen fuel cell applications. We opened the new West Australian workshop, which there is a photo on Slide 9. And the focus of inventory turnover yielded positive permanent reductions in inventory. Slide 12 shows the Adrad Distribution highlights. The main impact on the Adrad Distribution segment was the increased utilization of the existing network, infrastructure and maintaining the fixed cost base. This yielded revenue growth of 7% and along with margin management led to an EBITDA increase of 25%. A key in the improved earnings was a strategic approach to pricing that led to increased gross margin percentage. The focus on inventory management and inventory turns resulted in a reduction in inventory with further improvements to come. I'll now hand over to Rod Hyslop, who will go through the financials in a little more detail. Over to you, Rod.

Thank you, Darryl, and good afternoon, all. I'll now briefly take you through the half year results for the company. I'm focusing primarily on statutory results here, but I'll also touch on pro-forma results, too. Starting with revenue. The company generated revenue of $73.5 million, being approximately 7.6% above the prior comparative period. And as Darryl mentioned, that's in line with the forecast growth range of 5% to 8% that we advised at the November AGM. Revenue growth was generated primarily through on-highway and powergen demand in the Heat Transfer segment while the Distribution segment growth was driven by better site utilization following network expansions that were carried out in prior periods. Inflation has put pressure on expenses with increasing IT, insurance and occupancy costs. And we've also experienced an unusually high-warranty expense as we're now at the introduction of manufacturing processes in Thailand. The result is an EBITDA of $9.4 million or 7.7% above the prior comparative period. To be clear, though, this number is based on a post-AASB-16 basis. Depreciation has increased since we've been expanding the production capabilities across the network through investment in both buildings and equipment. The resulting net profit after tax of $3.1 million is 66% improvement on the comparative period. Bear in mind, of course, that statutory comparisons are a little bit distorted since the company listed in September 2022, so during the 1H FY '23 period. But however, the table on Slide 14 does include a pro-forma comparatives down at the bottom. So the prior period adjustments to pro-forma EBITDA largely centered around the IPO costs. And the current pro-forma EBITDA adjustments mainly relate to the allocation of shares under the employee share plan to all eligible employees in recognition of the successful IPO. Turning now to the balance sheet. We find ourselves in a good liquidity position with a combined cash, receivables and inventory in excess of $86 million, compared to trade payables of about $10 million and net assets of close to $120 million. The cash position reflects the revenue growth we've experienced combined with receivable collection and monetizing inventory. And as Darryl pointed out, inventory has reduced $4.7 million since 30 June in response to a concerted effort to increase stock turns and reduce raw material holdings. And as Darryl also mentioned, the senior executive team and the Board have invested considerable effort in progressing the group's strategy and the company's balance sheet is in a good position to support the strategy as it's further refined. The cash flow statement on Slide 16 here is a very positive story, having generated $11.1 million from operating activities this half. You'll note capital expenditure is up, having invested in new equipment for manufacturing operations and the production building extension in Thailand. Lease payments have also increased following contractual annual rent reviews and the commissioning of the new Air Radiators WA workshop in October 2023 and a good picture of that being on Slide 9 for those interested. And finally, the dividend. We're pleased to have announced a $1.33 per share fully franked dividend for the period with a record date of 20 March, payment date of 3 April, and that will be a distribution of approximately $1.1 million. So with that said, I look forward to seeing and speaking to a number of you over the coming days, and we'll now hand you back to Darryl. Thank you.

Thanks, Rod. Just a little thing to note in Rod's presentation for those who do some of the analysis that cash flow from operations was more than 100% of EBITDA. So we're returning in cash more than 100% of EBITDA, and that's mainly through the improvements we've got in inventory. So now let's chat about the growth initiatives that are on Slide 18. Now for those that are following the slides, #18 is one that doesn't have a number on it. So it's between 17 and 19. In Heat Transfer Solutions, key growth initiatives include expanding the revenue base in Asia. Very key thing is to increase the revenue that we receive in Asia from the plant in Asia. And one of the things we're doing there is to get a business development manager appointed, which we're in the process of hopefully achieving shortly. We're also optimizing the manufacturing capacity in Thailand and increasing the volumes of production made there compared to Australia. So that includes moving volumes from Australia into Thailand because it's a lower cost production. It's development of new and unique products, including supporting the shift to renewables, and I'll cover this more when I talk about Slide 19. And we want to continue to grow relationships with our international customers and potential customers. In Adrad distribution, we'll focus on being the first choice for cooling solutions with trade and industrial offerings focusing in cooling-related products while utilizing the existing infrastructure. And we're looking at adjacencies and other expansion opportunities so that we utilize our balance sheet strength. So turning to Slide 19. As I mentioned, this details some of the initiatives that are underway in Heat Transfer Solutions or Air Radiators as we develop cooling modules for the introduction of hydrogen fuel cells into the mining sector and other heavy industries as well as other developments, particularly in the use of our Alu Fin technology, which is a leading-edge technology. Now turning to one of the slides we probably have the most interest in the [ outlook ], which is on Slide 20. We've now restructured the organization to have focus on accountability. New starters to the leadership team joined in December and January and are already having a positive impact with a new level of analytics and business focus. The new CEO, Kevin Boyle, has been appointed and will commence in April. Business is resilient and well positioned for growth, especially as the products we sell are non-discretion. Major original equipment manufacturer customers have indicated an increase in their build rates, which then means that we will have an increase in demand [indiscernible]. New product development is also progressing. So we remain confident of delivering revenue and earnings before interest, tax, depreciation and amortization growth in line with the recent trend and as indicated at the AGM of 5% to 8%. And lastly, we are planning an Investor Day in late May to June, probably in Adelaide, so investors can firstly meet the new CEO and the management team. The team can outline the strategic plan and importantly, have a tour of the facilities in Adelaide, which will indicate to a lot of investors just how difficult the business is to replicate. And as a follow-up today, Rod and I have investor meetings next week in Sydney and Melbourne. So we'll catch up with quite a few people in that stage. So thank you for joining us today. It was short and sharp. A nice way to do it when you've got good results. It's an easy way to do it, no point dwelling on things. But the results for the last 6 months were very good, very strong, and we expect to continue that trend over the next 6 months and beyond. So I'll now pass over to Mel to take any questions there may be.

[Operator Instructions] We've received one question. Under expenses, there is a large increase year-on-year in warranty. Note 5 to accounts. Can you explain what this relates to and the reason for the increase? Is this likely to stay elevated or return to earlier levels?

Yes. What's occurred is that there's a couple of things that relate to this. We've had -- and they probably all occurred at roughly the same time or in the same period. We did have some challenges when we were moving product from Thailand to Australia. But then we've also had some challenges. I won't get too much into the technical side of it with some of the parameters that in some of the radiators as well as some movement in some -- there's been some issues with a couple of the designs, not necessarily our designs, but there were some issues there. And there's also been a couple of issues with design in some of the systems are used for cooling of the data center systems. So we expect that those warranties will stay elevated this year because problem you have -- challenge you have here is that once you've got a problem, it can take a little while for some of that to work through, but we don't see it as an ongoing issue. We have to solve the issue, which for the [indiscernible] we believe, is now solved. And frankly, there were some challenges with the company we source the product from. They changed some of the formula and without our agreement or knowledge. So -- but that still impacts on us. So we expect it to stay at the similar levels for the rest of this year and then the aim and the challenge will be to bring it back down to much more traditional levels. Being a manufacturing industry, you're always going to have some degree of warranties. This year is much higher than prior periods, and we don't expect that to continue beyond this year.

Thanks, Darryl. Alex from Morgans has asked a question on distribution. Can you expand on the strong competitive pressures you're seeing in the market?

Yes. In the distribution side, pressures are always there. It's always a challenge when you're competing with some of the big guys there. It's also with the products that we're in. There is some challenge on pricing, but nothing that I would call out of the ordinary. It's always a challenging market. We're in a good position in the target areas that we're targeting. So we don't see it as being -- we're certainly not seeing a big drop off in demand, if that's where that question is coming from. But it certainly has moderated from the days of sort of just post COVID, but not significantly different over the last sort of 9, 12 months or so.

[ Lachlan from UFF ] has asked, is there more room for unlocking cash from inventory? Do you have a target level?

I think the simple answer is yes and no. There is definitely additional ability to reduce inventory and absolutely. Some of that will take some time because of the type of inventory we will carry so in Air Radiators or Heat Transfer Solutions, the raw materials may take a little bit longer, obviously, to utilize and move. And also distribution, we do believe that we've got opportunity to still reduce that and get the inventory turns up significantly from where they are. So the levels that we've achieved should be the tip of the iceberg. When you look at -- when you do a calculation of inventory to this, we're not at world's best practice, and that's where we've got to get to.

Thanks, Darryl. Chris Matthews has asked, are you considering a buyback based on cash in hand in a very subdued share price compared to the IPO price?

I think the simple answer to that at the moment is we haven't gone the track of capital management because we're -- whilst we're conscious of it, in fact, there's been broadly discussed at the Board. We're still in a situation of determining where we're going strategically, what we would prefer to put the cash to use in the business, in the segment, but -- and given a reasonable time to do that, which sort of a 12-month period, I don't consider is long enough because you don't want to be -- force yourself into making decisions to do something that may not yield the right benefits for you. So the intention is still to utilize the cash in the business and find the right opportunities. If we're not able to do that within a reasonable time frame, then we would have to look at what are the other alternatives, which would obviously include returning funds to shareholders.

Tim McArthur from Asymmetric Asset Management asks, could you talk further about the pipeline of opportunities you're seeing in powergen for the Heat Transfer Solutions division?

Yes. The heat transfer solutions is an interesting area. It's an area where there's significant opportunity. The key with some of the product there and we mentioned it previously, and I mentioned it briefly in the presentation. But some of these take a long time to get to commercial production. So we currently -- for example, we've currently got or in the process of getting a couple of hold on radiators, but they're massive. So try 3 meters by 3.5 that go into mining trucks and getting those manufactured and tested within the environment. That will then take some considerable time to prove that technology, prove if it operates in that environment. And we're confident it will. Otherwise, we wouldn't be doing it. And so obviously, the customers will. If on the basis of that gets through that testing phase, then it doesn't just open opportunities with that customer in the mining segment. It will open up with others because we don't want to do testing with multiple customers or we've been approached by a number. We want to do the testing focused, get it proven and then we can open up to a number of others. So there's opportunity there. There's also the opportunities in Heat Transfer Solutions in Asia. We haven't even touched that at all to any degree at this stage. We're supplying a little bit into Asia, particularly the one major customer, an international customer, but we don't spend a lot there and we don't sell a lot there. There's good opportunities to grow that. And that's why we need to get a person that is knowledgeable and full-time working on that business development in the Asian region and have the product that suits the market, not the Australian product, assuming it will suit that market. So we have to have fit-for-purpose product, but we need the people in the field to do that. So we've got a couple of investments in [indiscernible] resource. We'll be doing to develop that area further.

Thanks, Darryl. What is the service scope, if any, for transfer of manufacturing or expansion of manufacturing in Thailand?

There's still ample scope for manufacturing in Thailand. Part of it is having the right facility and the right sizing and condition. But there's -- and I'll give you an example. We've recently had an order for a dozen big units go into the powergen sector. All of those will be made in Thailand. So it's a little bit of order by order, but everything that can possibly move there should be moved there. There's still further work in Australia that we can move there, but we just have to get the production capabilities made up to do it. And we also have to develop the people experience. So we shouldn't underestimate how much knowledge and people experience you need. You can't just get literally management -- people off the street, bring them in, get them to start manufacturing product. So it's developing that skill base. So there's still more that can go there, but it's just -- it's a matter of a time frame, matter of planned progression to move product across, which we're continuing to do. There's still plenty of opportunity. And it has to lead to a further rationalization of our production capacity in Australia, which we haven't really moved on yet. And that's something that's outstanding that we know that once we get enough of the product move we have to do some further rationalization.

And in relation to FY '24 guidance for revenue and EBITDA growth of between 5% to 8%, this implies a slight slowdown in the second half of FY '24. What are some of the factors that can impact whether you hit the top or bottom end of that guidance range?

I think it is naive to assume the 2 halves are in most businesses. It just doesn't work that way. So it will -- it depends so much on weather and demand. So we are not a business where you can and most business are where you can predict out 100% of what you're going to get. We don't have orders sitting up, sort of queued up. We know exactly what we're going to produce going forward. So consequently, we can't really have complete sight that we magnificently could if we had 6-month [indiscernible]. So there are so many factors that come into it, but just what are the customer's order and how quickly could we manufacture and what do they want to do. So I'll give you a classic example. So some of our bigger OEM customers produce products and their demand, whether they're making quite a figure, but say, 15 units a day or 20 or 25 units a day has a huge impact on our demand. And if they happen to drop that down for some reason, and it could be nothing to do with us, they can't get availability elsewhere of certain products or they have problem in their production lines or getting people, then that all have -- it has a domino impact. So there are just so many different things that can affect the business. So -- and hence, it would be silly to put out a fixed figure. But it doesn't mean a slowdown because if we hit the similar growth in the second half as we had in the first, then we're going to be at the top end of the range, and that's not what I call a slowdown. So that's the sort of things that we're going to be looking at. So there are so many factors as there are many businesses.

Thanks, Darryl. And our last -- well, it's more of a request than a question. Any chance you can do a site tour in WA?

No. Frankly, WA is well -- wouldn't be a bad thing. I know the [indiscernible] to get to WA. Look, the new facility over there and the new workshop is a magnificent facility. I was over there a little while ago, I had a look at it. It's a very good facility, but that's pretty much the facility in WA to be honest. So -- and realistically, it's half hour to an hour visit, you would have seen everything. The other part that we've got in WA is a small, and I mean small, it's about as small as you can get manufacturing facility that's just urgent to do local orders, and that's the manufacturing side. So I think the logic of actually doing a site tour over there is probably not logical, not cost effective. And I'm sure all investors will be very conscious that we have to be very cost efficient in what we do. So I think the likelihood is very low.

Thanks, Darryl. That's the end of our questions. So I'll pass back to you for final comments.

All right. Well, thanks, everyone, for joining us. So we look forward to the new CEO. We look forward to presenting the full year results and I will certainly be available at the site at the time. And we thank you for joining us on this. And for those that we'll see next week, either in Sydney, Melbourne or somewhere else, we look forward to seeing you. And thanks very much for your time today. Thanks, everyone.