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

We have Stealth Global Holdings, the ASX code SGI. They have a market cap of around $20 million. Stealth Global Holdings is one of Australia's largest industrial distribution groups, combining company-owned and independent retailer assets, providing more than 1 million products, supplies, parts and accessories to business, trade and retail customers. Presenting himself today, we have Group Managing Director, Mike Arnold. Mike, welcome back, and over to you.

Thank you, Paul. Appreciate you having me back on again.

Our pleasure.

Terrific. So our business, if you can just move to the next slide, please. We're really evolved over the last 5 years, particularly since we listed. And in that time, we've completed 7 acquisitions, and we continue to develop ourselves and win market share as well as strengthened the core of our business. So today, we're a wide-range distributor as well as a retailer of industrial maintenance, repairs, operations and automotive products. So simply, we use an omnichannel model, so physical stores, bricks and mortar as well as online. We also provide an on-premise solution as well as having call centers and people that are operating in the field in terms of technical specialists. Our theme is to provide products and solutions to every workplace. And what that allows us to do is cover commercial trade as well as DIY type consumers. Our mix is clearly bent towards B2B, and that's about 75% of our total revenue today. Our overall ambition is to be the market leader or the alternative -- market leading alternative to the majors. We are winning quite a bit of market share, particularly in certain pockets as we are strengthening our offer. And we're really looking to create a favorite place for customers to attend. We've really focused on long-term sustainability. So over the 5 years, we've grown from $24 million turnover to $111 million in FY '23. And as I say shortly, we've also increased our results in the first half of '24. And they are pre-completed order. Next slide, please. So why would you invest as such. We operate in a large, fragmented and attractive market at $60 billion in addressable size, the largest player holds less than 5%, and that's Wesfarmers. Our businesses create scale. So today, we have quite a significant infrastructure that's operating throughout Australia with 65 stores in operating in every location and state and territory. Our offer is definitely differentiated to a number of other organizations or competitors. So whilst we have competitors in verticals, we don't have any single competitor that is like-for-like. And that allows us to provide a one-stop source solution for a whole host of customers across all different industries. We've got a good strong financial track record, as well as a healthy balance sheet. And as I'll show you shortly, our debt continues to reduce -- our fixed debt. And that's obviously helping cash returns. And to the point that we're looking at paying a dividend for the FY '24 period and more information will come out in the near future in regards to that. Next slide, please. So today, we're stronger. We're a more agile company. We're well positioned absolutely to capitalize on growth opportunities, and I'll demonstrate that in a few moments whereby as a vertically integrated business and horizontally operating business, there's a number of cross-selling opportunities that allows us to be able to put our products and our services across multiple pillars. Next slide, please. So our target has been $200 million by 2025, with an 8% EBITDA. So that remains unchanged. We are in the process of completing our outlook for the next 5 years and what we would call a next-level strategy. And in that, we have a target now to $300 million by 2028. How will we get there? I'll show you that in a moment. But there's a number of organic and inorganic opportunities that present itself, not only within our existing business, but new range of products, new geographies, M&A activity that we have always mentioned, we are actively seeking. We have new services that is in the process of being launched. And we also have a charge through model that is also about to commence, and that will generate that $60 million. And where the sales is actually a relationship between our retail partner and our supplier partner, but it's invoiced through the Stealth organization. And net cash on a very similar operating model to that as well. Next slide, please. So today, where are we? We're at $125 million run rate, 65 stores throughout Australia, 95% of the products that we sell are nondiscretionary items. So obviously, we're very resilient in a number of different economic environments, both in the current environment and obviously, from a resources point of view, from a construction point of view and even from a housing point of view, and more people are now rather than sending motor vehicles out to get repaired, they're doing it themselves. So that's actually generating more customer for us. The $60 million pipeline, our portfolio -- or network portfolio operates for sales of around about $260 million, of which we're looking to bring $60 million of that as income through the Stealth organization. And that's an operation that we've been talking about now for the last few months. The $60 million only represents our 3 main suppliers, and that's just the tip of the iceberg as I say. So we are putting a number of digital and data and technology solutions together. So we bring efficiency and simplification for not only the retail network partner, but also for our suppliers. So the efficiency, for example, is we can reduce just one particular month of invoicing or one supplier from roughly 1,100 invoices down to 3. So we're absolutely well positioned to continue to reduce our overheads in terms of the lower cost of sales, but we're also well positioned to actually have a hockey stick effect in terms of our growth. Next slide, please. So indicatively, these are the numbers for the first half of FY '24, which will be released shortly. So we've grown again. It's our record half for the first half in terms of our operations since listing. And we continue to not only improve our revenue line, but also our profitability line. So our gross margins has increased as a percentage. Our net profit has continued to increase in our EBITDA. We have also exited ourselves from about 12 now -- 12, what we would call nonperforming or non-acceptable return on investment customers that we acquired during previous acquisitions, and they were new customers that we took on. So we -- if we don't -- if it doesn't meet a particular threshold, then what we do is we obviously have a review period. And in doing that, we obviously look at ensuring that our capital is well deployed. So our ROCE has obviously increased quite considerably. And importantly, our cash flow generation is strong. Our net debt position is strong. It's almost down by half over the last 12 months, and we continue to reduce. In fact, it's down almost $2 million from 30 June. So out of that $5.8 million that's listed there, roughly $1 million relates to fixed debt, and that will be all paid off by 30 June this year, which the balance is then left with what we would typically call working capital debt. And what's associated with that is, obviously, general trading, and we have roughly $15 million worth of inventory. So good profit, good revenue, great cash flow, good responsible and disciplined debt management, and all our indicators are obviously hitting in the right direction, and EPS has increased almost 50%, which from our perspective, obviously is pleasing. Now there's still work to be done from a profitability point of view. We've got still some work to do. However, we expect, as I mentioned earlier, a hockey stick effect by the introduction of new revenue streams. In fact, just to quantify that a little bit more, our target is to get between 12% and 15% operating profit on all new revenue that's -- new growth revenue that's being achieved. So that's how we'll continue to head towards the 8% EBITDA and $200 million revenue target in 2025. Next slide, please. So as we move forward, we've really looked to simplify our business under a new operating structure. So we talk about one group, 2 business units focused on industrial MRO and automotive with 3 customer segments that's focused on the commercial corporate business customer, the individual trading, and then DIY customer. So we touch all those points. There's significant growth opportunity in all those 3 areas. And what we're doing is we're launching a number of new initiatives, including a rewards program that will be state-of-the-art underseen from an industry point of view that we're looking to attract, retain, obviously reward loyalty with our organization in terms of the purchases that are made. Next slide, please. And that cascades down really into a comprehensive offer, both from a wide range perspective and also value-added services. So in doing that, we obviously have categories of industrial safety, PPE, automotive parts as well as general workplace suppliers, and that fits any particular work environment. The hire services and rental as well as loan a tool model is coming in, whereby that's new launch. We know that, that will generate about a 68% gross profit return for the first 14 weeks. And after that we expect higher gross margin. From a net margin perspective, we're expecting mid-25%. So it is a high-margin business. It's inventory that we really hold. So it's not as if we expect meaningly increase in working capital requirements or within the asset base. This model has been tried and tested. And obviously, there's a number of organizations that do that. We won't be in the Kennards and the Coates Hire large part of the equipment side and plant. We will be looking at the type of products that we sell, so tools, equipment, lighting, water pumps, contract [Indiscernible] those sorts of things, which in this environment has a need. We're not doing that to at the detriment of our existing sales. It's actually an adjacency that we're moving into. Next slide, please. So our focus over the course of the next 12 months and beyond is really focused in 2 areas, top line and bottom line. So dynamic pricing, making sure that we win more business with customers and really focus on the best experience. But we're also looking at our cost structure. We're also looking at the well-being performance and the experience that our employees have an operational excellence is really important in everything that we do. Next slide, please. So we're well placed to win. We've got scale advantage. We've got good volume growth now, which has allowed us to improve our gross profit line. Our customer base is growing, obviously, with our debt reducing and our cash increasing, that's obviously giving us more financial strength to win more market share. And from a productivity point of view, digital data and automation is absolutely top of mind. And that's something that from an efficiency point of view, we like everybody else, we're working really hard to bring that in so that we can have real-time information and better information so that we actually predict more of what happens within our business without the manual duplications associated. Okay. I think that's all. Thank you, Paul.

Thanks, Mike. Plenty of questions here. First one, I just want to -- just to congratulate you on those numbers you gave us to look at earlier. 2023 was a pretty tough year for markets. And your numbers are clearly demonstrated that you have navigated those orders pretty down well, and it really hasn't affected your business, and you expect as those inflationary headwinds debate this year that you can really see a really good pathway for Stealth in 2024.

Absolutely. Look, our second half of every year is typically stronger. So 55% to 58% of our revenue generated in the second half, but our profitability is actually significantly more, and once we get past the January period, then obviously, there is a number of trading days there and the ability to be able to improve our profitability. So look, we're really excited about not only our growth, but also the efficiencies that we know we can bring within the existing business to make us more leaner. So one of our key drivers is lower costs as a percentage of sales, and we've done that again in the last half. So we continue to pick up roughly 200 basis points of improvements. And our target is to get below 20%. We're sitting about 24.5% at the moment in terms of our cost of doing business.

Okay. And can you just give us a little update on the integration of past acquisitions like United Tools and Skipper and the full realization that was associated in synergies.

Yes, we had a quiet year in 2023, Paul. We over the last 12 months, we haven't made an acquisition after completing 7. But look, the -- what we found with both those businesses, particularly around -- and this is driven by the customer is the need for having a wider solution. So we're actually removing the Skipper Transport Parts name and business, we're converting all of those into Heatleys. So basically will have Heatleys Safety & Industrial, the automotive part that will cover that B2B side and then from the United Tools perspective, looking at using that as a key brand so that we can bring that together and push really 2 key brands and bring brand awareness and brand strength behind those, but also with our loyalty programs and also the way that we engage not only with our retail members, but also with our suppliers, it just brings more unity and value from an investment point of view. So 7 brands to 2 is something that -- it's a no-brainer and it cuts out a whole host of work that, again, just supports our cost of doing business reduction.

Good. And a question here. What percentage of the market do you already control? And do you have any customer concentration risk, i.e., any major customers that contribute significantly to your revenue?

Great question. I haven't covered that one. The absolute beauty about where we operate is that we don't have any concentration on any customers. So our largest customer represents about 4% of our total revenue. So we really have diverse customer base. All our debt book is insured. So from a bad debt perspective, we're all covered there. Around about 12% of our business is cash generating. From a market point of view, Wesfarmers, which is Blackwoods industrial safety section they hold, I think today around about 4.2%, 4.3% of the market, and their turnover is mid $2.5 billion. So we're a pinprick pinpoint I would say on that. But our ambition is to take market share. So we would -- we'd like to see ourselves in the next 5 years with acquisition-based growth being at least halfway there.

Mike, always a pleasure to have you on and congratulations to you and the team for what was a very good year last year, and we will watch the story very, very closely. It looks like things are rocking and rolling there.

Having lots of fun, Paul.

Mike, you have a great weekend.

You too.