Stealth Group Holdings Ltd (SGI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Stealth Global Holdings Investor webinar presentation. With me, I have the Managing Director and CEO of Stealth, Mike Arnold. The investor presentation was launched yesterday. Mike will take us through the presentation and we'll take the opportunity to answer investor questions following the formal presentation. [Operator Instructions] I'll hand over to you now, Mike.

Thanks. I will welcome everybody, for an updated presentation not only on the half year results, but also Stealth strategy going forward. I appreciate that we moved this presentation by day, one of our long-serving employees that actually started with the business and on the day that we commenced trading at Stealth passed away and have been fighting about all of cancer for a number of years. His name is Graham Stocks. And the company obviously was involved in attending the funeral and the wait thereafter. So let me take you through the presentation. Obviously, we're well positioned now in terms of what we've achieved of course not only last 6 months and 12 months. But in the last 3 years, we continue to grow from an organic perspective. And also in line, we operate in a large addressable market of about $40 billion. We've identified as a pure-play distributor of MRO supplies and safety supplies products we feel that our business model is now competitively advantaged across a whole [indiscernible] of diversified markets. And in doing that, we feel that there's a number of leaders that we can pull through, I guess, an embryonic phase of our growth in terms of our new merger and with the financial capability to support that, which I'll take you through shortly. And we still maintain our outlook of achieving an 8% or greater EBITDA by 2025. I guess the other thing that's been really key in our relationships with customers and suppliers, particularly is they continue to grow and quite significantly. Again, I'll take you through that. There's long-standing relationships on both sides, we're leader there, which will support our business and drives repeat sales. So from a company point of view, I'll take you back through that we cover customers of all types and all sizes in the work environment. So a business-to-business distribution as well as a business-to-consumer distribution, which people can acquire for the home. Our advantages really are now a broad product offering, our supply chain infrastructure . We've got very strong e-commerce platforms that we've invested heavily in, particularly over the last 18 months. Our supplier relationships have advanced again considerably with the strategic investments of acquisitions over the last 6 months and 12 months. And our value-added solutions model, which is on-site solutions has continued to evolve its software, we're operating across some 19 different customer locations now. On the right-hand side of the screen, you can see the brands that we have within our portfolio now. 4 of those brands are leaders in their markets. They've got long trading history in Heatleys case 35 years, in C&L's case 54 years. And Skipper Transport Parts was previously the old commentaries automotive, where we've acquired those branches in Regional West Australia as well as in Perth. At a glance, our strength is really across multiple where you can see from a leverage perspective, our connected network is considerably growing if you're looking at the Australia map. 3 years ago there was 1 dot on that map, 6 months ago there was 33 dots on the map. So together, we're in 66 different locations. That's led our business also from acquisition perspective to grow to a run rate today of about $100 million annually. We've created the largest network of company assets and partnered independent retailers within the Australian MRO market. And the intention of that is really a plug-and-play distribution model. So as we bring in other businesses on an acquisition front or as we add other products into our portfolio and cross-sell that becomes really important that they just ultimately fit into all operating entities. The other thing that's occurred as well is we've really focused heavily back in Australia. I guess the last couple of years of COVID have -- and the restrictions of trading and also government lockdowns has meant that we focused very heavily back in the Australian market. And I'll take you through our BSA investment in the U.K. and the reason behind that shortly. But I guess in the short-term, with the acquisitions that we've taken in the last 12 months -- 6 months and one that we're about to close out means that all our efforts need to be centered on making sure that they get integrated well. So if I can just take you through the last 6 months, particularly. We've made really good progress on our strategy. Our journey has always been deliberate from October 2018 when we first listed with a revenue base of around about $22 million. So high growth, obviously, in 3.5 years to get to $100 million run rate. The last 6 months of being material shift with us in the acquisition of Skipper Transport and also with United Tools and both those are embryonic with an exciting future, both from a financial perspective and a continued growth perspective. We're the only [indiscernible] , as I mentioned, from the largest distribution point of view, that has the depth of the product range that's available. So we can deliver experiences that no other organization from one single source or one stock distribution platform can deliver, and that's actually a really exciting point of difference for our business. And as we integrate those and as we start pushing the cross-seller products across the portfolio, it will be very compelling in terms of our financial returns over time. We do follow peers, I've said this before, on an international level. And those peers are operating between 12%, 14% at an EBITDA line. Our model absolutely has a push to get to 8%. But Longer term, we anticipate low teens in terms of our EBITDA margin. The full benefit of acquisitions as well as new customer contracts and the synergies from wrapping those businesses together is at its embryonic phase, and we see that, that will drive future benefit and material upside for the business in the coming medium-term. Specifically on the last 6 months, if I can talk about, first of all, global supply chains. Clearly, there's been disruption that's been well reported across all industries. We've managed exceptionally well. The good thing about operating internationally as well as domestically in Australia, is that there are a number of things that we get early warning of. So we actioned very well. Our -- the management of our supply chains. There are some select products that were delayed in terms of the supply, that didn't impact on sales of approximately $900,000 of orders that typically we would have got into the first 6 months that will fall into the second 6 months of trading. From COVID-19 perspective, all our main product range continued to perform. We did sell a number of COVID-related products in PP&E, and that obviously helped sales activity, but it also helped making sure that our customers are sticky as a one point of contact. Our results were very good from a revenue perspective were up 55%. Our gross margin was up 29.8%. It was 29% for the full year of FY '21. So that's actually been nice that we continue to increase our margins and our decision to extra Africa operations some 2 years ago on a low-margin contract has proven that by focusing on the right customers with the right product mix continues to drive our gross profit margin, which was at 18.5% 3 years ago. We've acquired 2 companies that's added 3,000 customers and about $26 million of revenue. We'll be doubling the number of store outlets in Australia by 38. And when we complete the acquisition of United Tools in the next week or 2, those outlets will come together. We've also been successful for the first time in Australia of winning several new large contracts. Those contracts are for terms of between 2 years and 5 years. They're being onboarded right now between November was the first contract rollout. The last of those contracts is getting rolled out at the moment, operating at about a 20% level of what it will be in the next 18 months its peak. We've continued to invest in the future and maintained really good, I guess, prudency around our capital management and allocation. I'll walk you through that shortly in terms of investing in the future has been really important as well as investing in employees. And in Western Australia, which a large part of our income is obviously generated and the constraints around -- first of all, low employment as well as a number of mining companies, obviously paying high wages. We've been able to secure and have a low rate -- to low turnover rate. So we've incentivized our staff to be a part of our future. And we'll also make sure culturally that our organization provides a better environment for our staff to obviously retain and attract new employees as we continue to grow. The sale of BSA brands, which has been cemented in the recent days, where we've received approximately $1.6 billion in cash. BSA sold to a U.S. company in private -- backed by private equity in December. We with our joint venture in the U.K., with Bisley PIP have a global strategy as a wholesale distribution business. There was a drag on [indiscernible] within our contract, it made sense for them to obviously acquire the business in the U.K. For us, obviously, with the push in Australia to receive that money back into our business, a couple of million dollars. Essentially, it's turning over $2 million of revenue. It's been break even over the last 12 months, $2 million return on that for based on future profits reduces our debt by the same amount, which is obviously important but also allows us to put the working capital into our new ventures in Australia. We've continued to push our technology aspect, and that's been really key on winning those several contracts that I mentioned. And also from a store perspective, we've opened up this new store in Kalgoorlie and we've also continued to reinvest in refurbishment to upgrade at the status of our stores. Key figures at a Glance, which I've already mentioned these, but a couple of ones that I'd like to go to specifically from an NPAT perspective, that was up to $800,000, up %400 of the same. Our cash position improved by $1.2 million, and our net assets have increased as well. Up until we acquired C&L in December of 2020. Our debt was very low and mainly associated working capital. So clearly, we watch our leverage. And with the $1.7 million that's just been received as well as the acquisition, the cash contribution that's coming in from United Tools will generate another $1.3 million of cash coming in. So we're really going hard on making sure that we've got cash reserves and available working capital. The progress on strategy, I've mentioned the 2 aspects or 3 that I'd like to point you to. So from steps 1 to 6 has been significant. There's not a lot of organizations that have actually achieved this in such a short period of time. So we've been heavily engaged and focused in terms of high growth. We have converted from multinational business to an omnichannel business, essentially an interconnected portfolio, which I mentioned all those 6 companies have a number of supplier relationships will consolidate into a master buying group. And then as we go to market would be sales to the brands. The United Tools acquisition will settle in the next week or 2. It's currently $8 million worth of revenue through that business, the 33 independent outlets are raised by that day. And obviously, in the first 90 days of our consolidation, we'll be looking at overlapping those existing relationships with suppliers are on all brands and moving that into one brand, renegotiating the key terms and conditions across our portfolio, which we're looking for that to not only drive leverage from better buying power, but also making more products available across the portfolio. If I can cover just a couple of key aspects of 5 slides on the financials, which obviously everybody has gone through, I've mentioned the gross margin aspect. We've repaid debt of about $800,000 up until the 31st of December. We've since seen in Q3, we would have paid another $400,000 of debt off. So we've been really prudent in making sure that we continue to bring that leverage down, as I mentioned, but also at the same time, building our imprint so that we have a better return on our investment in the future. So clearly, to be a world-class and a market-leading business, we need to make sure that how we present ourselves at stores, having the omnichannel experience, also the way that we're branding, presenting ourselves and growing our business within a very fragmented market that provides us with the opportunity. And as I mentioned earlier, it's a $40 billion market, the largest player in that market has less than 4% market share. So from our perspective, we see an enormous opportunity by making sure our infrastructure is set to go, and we jump at this next phase of our progress. Again, a couple of key points here from an investment point of view, $700,000 of our revenues for -- $700,000 of our cost in terms of our revenue growth has been associated with investments in significant items. So we acquired Skipper Transport Parts in August. That has been an onboarding process that's different from prior acquisitions. We've moved in onto our own ERP system. We consolidated the distribution into one distribution center with Heatleys. So that we can get economies of scale in terms of delivery runs and also the use of labor and footprint. And in doing that, we spent approximately $700,000 just associated with the Skipper Transport Parts integration. We expect that integration to complete this month in March and will then be into operating phase. Our cash on hand has increased, which has been really pleasing and diligent management by our finance team. Our net debt has increased, and that has been associated ultimately $4 million for the Skipper Transport acquisition, which is all asset based and the balance of that was associated with the C&L acquisition, the final payment and the e-commerce development within our business, which has been integral, as I mentioned, for us to be able to not only with new business from large contracts, but also ensure that we can play in the B2B space and the B2C space. Our digital sales have grown by approximately $2 million against the prior period, which has been pleasing. Organically, we've grown at almost 6%. And we've also had $15 million worth of new sales coming from the contribution of acquisitions. Our margins from an EBITDA perspective continue to grow slightly. Again, we're continuing to invest in the future we see in the short term that, that will be flat. However, in the medium-term, as we obviously onboard United Tools and we get into operational phase of Skipper Transport, that will all significantly start to escalate. We'll continue to invest. And those investments will really be around our on-site solutions, which is making our customers stickier. But also from a store fit out perspective, we'll be rolling out other brands and products into the Skipper Transport business and rather than just automotive and tonically putting the automotive products into the Heatleys stores in Kalgoorlie and also in Bunbury to start with. The discontinuing operations, so our accounts in the first half are a little bit messy because of the removal of BSA brands. And there is no adverse material effect on our profitability. I think that's important. So $2 million of revenue will drop on an annual basis. However, the profitability in the organization will remain unchanged. And most of that is driven out of our Australian operations. Let's move through these slides. If I can take you through the strategic direction heading 2025. So we continue to, I guess, fine-tune and as we enhance our business. Importantly, our ambition is really now to transform the delivery of industrial MRO and solutions within the Australian marketplace. We feel that we can take a leading position or the leading position whereby the depth of our range now is connecting all our products to every workplace as well as the residential environment and people have the option to buy that in-store or online or through our sales rep or even on site. That's quite a powerful play option that we have now available. We are absolutely pushing to be the #1 choice distributor for our suppliers and our customers and any other stakeholders as well as our employees we will continue on an organic and an M&A-led growth strategy. And we're very confident about leveraging business combinations with upside in the future. And most importantly, the benefit that will come out of creating an ecosystem of an integrated portfolio of all our brands into a one Stealth distribution model. We absolutely want to be the company of choice in getting some detail into the strategy, I guess, is [ capturing ] all suppliers into verticals, our top 400 preferred suppliers will stick within a master buying group, and that will feed our sales businesses. So we'll have essentially people focusing on the back end, buying and giving us the best price and the best merchandise that's available. On the front end, the customer is giving them more choice, focusing on infrastructure, but we configure our customers on a local and a national level for real-time fulfillment. Everybody else that's involved in our network and our stakeholders, we want to be the company of choice that can be for shareholders, can be for employees or anyone else from an advisory perspective, we've got a really good push and a hard push within our organization to get to that type of experience. From a financial point of view, we expect to grow from a revenue perspective, 25% each year for the next 3 years. Our target is still maintain to be 8% at 2025. We will push for gross margin growth on a year-by-year basis as well as maintain a debt leverage that is below 3x. And at the moment, that's sitting about 2.2x to 2.3x. Our priorities on the short-term, and I guess the mid-term horizon sit in value levers and key drivers. So the value levers are really about leveraging the combinations, as I mentioned, the network investment is making sure that we continue to expand our footprint, more outlets. We will ensure that every store becomes a hub for distribution. So whilst we're going to all on model buying group, not everything will be held in distribution center. We want to make sure that we've got more stock available in stores for customers so they can receive it real time. So investment in inventory becomes key. The capitalizing on the opportunities of the integration, consolidation, the revenue synergies, cost synergies and the diversification of our business gives us significant upside, whereby better buying power. We have better opportunities for greater supply collaboration, more operational performance enhancement and the cross-sell cannot be understated in terms of the amount of customers, which we identified were about 3% crossover between all businesses. We feel that 100% of our customers can buy all those products from us for the future, which the economies of scale of that will drive a lower cost percentage of sales. So we're actually really excited about what this business can evolve into over the course of the next 12 months and 3 years. Our outlook in the short-term is really good positive momentum. First 3 months, we've grown by 30%. So it's been a very good start in terms of our -- not only our customer engagement but also trading momentum. We do see that there's still be some disruption in the supply chains with specific categories of products. We have increased some of our stock levels in that regard so that we can continue to provide supply. Those orders will not impact on our sales. If anything, it just actually builds our pipeline of opportunity. Our markets remain strong. We feel that the pandemic and the economic situation. Obviously, with Russia and Ukraine is dynamic. And though at the moment, we don't see any short-termism to impact there. And the United Tools purchase, we feel will really leverage us from a scale perspective but also our ability to deliver attractive shareholder value in the future is something that we've really strived for, and I feel that we're significantly advanced in that process for a good journey in the coming period. So lastly, our business is more customer-centric, more supplier focused. We -- from a solutions partner perspective, we've really positioned ourselves well for a material uplift and just reinforcing, we now have experiences that no other organization of our type can offer. There are some great exciting prospects that from our new portfolio and where we're heading in the integration of those businesses we'll deliver some really good financial and compelling returns over time. And from a capital allocation perspective, we will be prudent. We will manage exceptionally well. Our CapEx will be associated with distribution chain, our key investments around stores and our branding position technology. And we will look at other M&A opportunities where it gives us value accretive contribution, whether that be through profitable gain, whether that would be through expanding our network, which will be happening or whether that gives us a new point of difference from a product perspective to increase our margins they will continue to be quite an aggressive push for us as a business. So thank you. I just wanted to walk you through that update. There will be a further update that will come through in the coming weeks with our strategy going forward with United Tools with some in-depth detail. But for now, obviously, there's a fair bit of information that we've made available to you, and we'll report on our progress through our strategies. We're at that size now of our business where we feel comfortable that more information can be shared to market without risk. And we feel really confident about where we're heading over the future period. So on that, I might revert to -- you came -- in terms of any questions that we may have that's come through [indiscernible].

[Operator Instructions] The first question is strong. Jonathan. Would there be any benefits in branding the various businesses under one name, has there been any consideration of this?

Yes, there's a lot of debate that's obviously around a single brand versus multiple brands. Our pathway for the short-term and probably the medium-terms, we're going to maintain the brands that operate C&L Tools have operated for 54 of years in the Queensland market. It's a well-known brand. Everybody goes to it for that reason. Heatleys has been operating North Australian market for 34, 35-like years, Skipper Transport Parts went through a rebranding name from Coventry's Automotive to COV's. And now Skipper try and change that up is a fairly significant cost what we're doing first is going into the buying group that will be one brand and how we go to market will be multiple brands. That's definitely the short-term outlook.

Thank you. And also from Jonathan. Are you seeing any inflationary impacts on supplier costs?

I think everybody's facing cost at the moment, particularly around the supply chain element. We've been really prudent in making sure that our cost to serve reduces and also the leverage of our buying power obviously improves our position. Some of those costs will have to be passed on in the short term, particularly around freight lanes. But obviously, that is short termism. I don't see that maintaining itself for the long term. And my research suggests that in 12 months' time, that will get back to a bit of normality. But because of the leverage of the group, there's lots of opportunity for margin gain, and that would be offset against any cost impact for the price of goods.

Thank you. Now from Steve, Mike, can we expect any more acquisitions this year? And how are you seeing the valuations of the businesses you may be looking at given the wild equities markets we've seen lately?

Thank you, Steve. We just completed 3 acquisitions in 12 months. Look, there are acquisitions that we'll consider. It's -- we've done that for the last 3 years, so to say that we're not is probably not true. However, we've also got 3 businesses that we need to ensure that they're maximizing the original intent. So the C&L business is going exceptionally well. Its profitability is up by 40%. Its revenue is going by about 30%. The Heatleys business has grown by 50% in its revenue and 100% in its margin since we acquired it in 3 years. The Skipper Transport business has been a bit more complicated, and that's not an operational phase. So there's some work to do there. We need to get that right first. And United Tools gives us 35 -- 33 stores, sorry, throughout Australia that is so much upside with that alone. So the balancing act of do we acquire something else and do a capital raise, take on more debt or look at other strategic options is a consideration, but the equal consideration is what is the value that we can generate by integrating all these organizations and actually generating higher profits. And I think that's something that will be considered on a case-by-case basis.

Next question comes from Helen and that's quite a long one. So revenue and net profit before tax were both up, but profit attributable to shareholders was down almost 90% because the vast majority of profits were allocated to non-controlling interests. Could you please explain what or who these are? And what are the implications for shareholders and the earnings per share in the future?

Well, as I mentioned earlier, the because we consolidated accounts for the BSA joint venture, and we're in control of that for that reason. There's a whole host of intercompany allocations that have occurred over the last half years with investments. I have recharges in terms of corporate costs from the Stealth head office into the U.K. business. And the way that the transaction was unwound, which is supported by our orders and we work closely with them, it doesn't give, I guess, a true reflection of -- from a consolidated point of view of where the business sort of lies. We -- from an EPS perspective, we still continue to be up. Our business through the benefits of Skippers and the benefits of United will have EPS growth. Our accounts will be a lot cleaner in the second half because we obviously don't have discontinued operations to reflect that. And I think by the time that we've integrated United and we've integrated the Skippers business and we've moved into FY '23, you will find that it will be a lot more clearer and get an uplift with all our margins across the Australian operation.

Next question is from John. Can you expand on the draft -- can you expand on the drivers of the 30% like-for-like growth in the first 3 months of 2H '22 for the current half year?

Yes, part of that's acquisition base, which is in Queensland. And that's continued with our C&L business. And also, we've actually moved some of the Heatleys' customers into the Queensland's market, which is managed by C&L. Thankfully, we've been able to sell some products previously that we haven't done that with Heatleys from the Skipper Transport transaction. And there's also some new -- those new contracts that started in November have helped with the first 6 months. In addition to that, we -- our larger customers are all growing, and our target is organic growth greater than 10%. And that's on the existing business, not the acquisition-based business.

And back on the acquisition which seems to be the theme at the moment. For future acquisitions, can you give us a sense of size in terms of revenue? Are you looking at something bigger or keeping 2 small bolt-ons?

We answered that question a bit in the last few weeks. Look, I think we've demonstrated in the last year that buying businesses have $15 million to $20 million turnover, we can bring them in pretty easy, and we can manage it with the existing corporate structure in place without adding any more significant cost to it. So we invested the money by getting the key senior team in place so that we can bring on businesses of that size, and we could execute it well. If there was an opportunity to acquire something bigger and better then that needs to be well considered because the whole landscape of our organization today will change in terms of how we fund that capital raising of the share prices that we have today would be unrealistic. And I think we need to do it for the right reasons that would add significant value to shareholders, of which obviously, on the largest. And then we would consider that. But where we sit today, our opportunity sit within the $15 million to $20 million range. And if you look at what we did with the acquisition of United Tools, whereby we are picking up $1.3 million, $1.4 million worth of cash immediately with a simple payout of $24,000, those types of acquisitions are important because it's initial upfront value. It adds longer-term strategic value, but we're also getting in partnership with a company that has great culture that merges in well. So there's a whole host of factors, I think.

And another acquisition-related question. I know you've been on the acquisition trial lately, but do you think Stealth could be an acquisition target itself?

I guess it [indiscernible] a little sense. We would be attractive. I think I've probably derisked that in the acquisition of United Tools. And what I mean by derisking is that with approximately 50-odd independent retailers that are part of our group, that has actually a little bit of complexity and doesn't get all organizations in terms of that type of model. It's unique. The only other, I guess, similar drive of business that is not in our space would be a net cash owning an IGA organization or a [indiscernible].

Mike, there's no further questions. So if you would like to wrap up. You can continue.

Great. Thanks so much. Thanks for the questions. If there are any more questions that anybody thinks of later, then feel free to reach out to us our contact details are all on our announcements. We're really excited about our future. We've got some exceptional people within our organization that really helped to advance as these new businesses also joint part of our portfolio, we just get stronger and bigger and better. And also it does really enhance in terms of what we're doing. So from a shareholder point of view, it's an exciting time. It's been an exciting time in the first 3 years, but I think we're really going to launch ourselves forward over the next 3 years by materializing the opportunities there. So thank you, and enjoy your day. I appreciate the people joining us. Thank you.