Coventry Group Ltd

I think we'll at least just wait a couple more minutes. We're getting a good turnout already and then we'll just fire into it. I think we'll keep it pretty relaxed, guys, but maybe if you would like to refer to the presentation and take us through it at your own pace and then we can open up for questions. That might be the best way of going about it, I think.

Yeah, Sam, what I'll do, I'll just sort of talk a bit and lead to the presentation. I might go through slide by slide because I just find that gets a little bit monotonous for everyone. They've all read it. So just what I'll try and do is pull out some of the key highlights and just give a bit of a sense as to what we see is coming in the next 6, 12, 24 months.

Yeah, good idea. Sounds good.

Let me know when you want me to kick off.

Yeah, I think whenever you're ready, go for it and we'll let people just come in as they wish.

Okay, fantastic. Thanks. Alright, we'll Overall, we were pretty pleased with the half year results. We generated sales growth and profit growth despite the fact that we had a number of things happen to us during the half that were out of our control, if you like. The largest of those events and the most important one to call out was the New Zealand government lockdown. Now, that meant that the whole of New Zealand was shut down for a period of time and then apart, mainly Auckland and some of the areas around Auckland, shut down for a longer period of time. So that cost us in the vicinity of $3 million of sales and about $3.25 million of profit, which was just unavoidable. Unlike last time when the whole country just shut and opened, it all sort of went back to normal day one. This time it took a bit longer because... with parts open, parts not open, freight and other things got out of kilter and just took a bit longer. But right now, New Zealand's just pumped out a very, very strong February result. Everything's sort of back to normal over there, if you like, and we're growing and performing well. The other main, and I'll just call them COVID impacts, were the construction lockdowns here in Australia, so mainly New South Wales and Victoria. So that slowed down our sales in that sector for a period of time. Right across Australia and New Zealand, and this is a global issue, is supply chain creating problems for us. We've done pretty well, and we've ramped up our inventory levels quite a bit to try and offset some of those issues, and I'll talk to that a little bit more in a minute. But mainly where we've been caught a bit is our roofing screws products into New Zealand. We've had shortages, and for a while we had steel shortages going down into our Narco business. About 35% of their business is steel products. That steel bit's tidied itself up now, partly due to the construction shutdowns in Australia, mainland Australia, creating supply availability, but we've also sort of caught up there at the moment. Overlay all of that is just been trying to manage the ongoing issues around our people. Our Thomastown office here, we're just starting to try and get people back to going now. January in particular, we lost some of our staff down the eastern coast of Australia due to COVID, either catching it or close contact. But what happened more was a bunch of our customers had up to 50% of their staff unable to work. So that slowed January sales a little bit. That being said, February's bounced back super strong, probably caught up anything that we didn't get in January through February. So again, the markets have come back strongly. If we look at the splits across the business units, starting with trade distribution, probably the most encouraging news for us is the fact that our Connect and our Tier Australia business, which got back to a break even after four years, of hard work at the end of last year has added another $1.5 million of EBITDA over last year in the first half. So we certainly feel now that we've got that business to a level that's sustainable from a growth perspective and we're on track over the next two and a half, three years to get that to our benchmark for business unit, which is 10% EBITDA. So that's very encouraging. Got a new general manager in there. We did a long handover with the previous general manager. That's gone smoothly. We're pretty confident about our position in that business, particularly with strong markets here in Australia. In New Zealand, we would have grown again with the exception of that shutdown period. We've got an experienced team. We're market leader. And again, we're confident that the markets will be strong over in New Zealand, that we can continue to grow there. The NAVCO business which we acquired Rod three years ago has gone from strength to strength. So it's had a very good first half on the back of a very strong year last year. So what we find with our acquisitions is they slow a little bit the first year after acquisition as the people settle and get to know us and understand that we are going to not come in and try and change everything. But that's bounced very strongly. Again, on the back of good markets, but a very, very good acquisition for us down there in Tasmania. On the fluid systems side, sales are up, but the profit number down slightly. The call out there is that last year we had the $8 million one-off order for the refuelling systems. That was at very high margin. So take that out. We've managed to fill... void with sales, but they are at lower margin and hence the reason that we haven't had a stronger result. We've also had to put some additional resources into that business to keep it sustainable. It's doubled in size in the last four years. We got to the point where the general manager had 18 direct reports, which just doesn't work. So we've had to put some extra resource in. On top of that, we've also got some pressures around labour shortages. That pushes wages up, also means we're having to do overtime to keep up with the work. So moving forward again, market's very strong, mining resources looks good at the moment. The biggest challenge we've got there, as has been the case for the last two to three years now, is just getting enough resources to do the work. So we're running our own apprenticeship programs. We hope to see immigration come back online soon, which will bring some skilled labour into the country and help us fill up some of the opportunity, because at the moment we can't do all the work we'd like to do in that market. From a balance sheet perspective you will see that we have increased inventory quite a bit. Now there's three components to that increase. The first is for the first time in a long, long time we've seen significant price inflation in the market. So a lot of our goods going up quite a bit. We have been able to push all of that through to our customers, so we're not seeing any margin decline because of that price inflation. But what it's done is it's meant there's a one-off increase in the value of our stock as we replace it with inventory that's at these higher costs. So it's quite unusual. Probably in my whole career, I haven't seen price inflation at the sort of levels we've got at the moment. I also haven't seen it as easy to push through to the customers because they need the stock and they're seeing increases from everybody else. So that's been a positive. The second component in there is actual physical stock increase to offset potential supply chain issues. And the third is we've got a couple of million dollars of extra work in progress in our fluids business and that will ultimately end up being a sale. So it's not an issue. Now we are going to pull inventory levels back to normal levels again now and take out that buffer, extra buffer we put in. So you'll see the debt level come down quite a bit before the end of the year on the back of some reasonably, hopefully some good profits as well as pulling that inventory level back down again. On the acquisition side of the market, we're seeing an increase in inquiries coming our way there at the moment. So we're assessing a number of different possible acquisitions, mainly on the trade distribution side. What we're seeing in our markets, they're all very fragmented, lot of family-owned businesses, Those owners, after two years plus of COVID interruption, are just exhausted from it. So whilst their businesses have performed well, as ours have, they've just had enough and they're looking to get out now. So I think that's a positive for us moving forward. We will stick to our acquisition strategy, which is to only buy profitable businesses, so 10% plus EBITDA businesses, so they're immediately helping us get up to our first benchmark, which is 7.5% group EBITDA, and they're low risk. So we're not going to take any chances in that area and buy something and try and fix it or do anything like that. We don't rely on... cost or buying synergies to make our acquisitions work. They just have to stand up by themselves. But look, some interesting activity in that space at the moment, which is nice. So that's probably, Sam, the really fast version of what's going on. I think looking at the outlook, we're pretty positive. Despite all of the things that are going on, COVID-related and other things, as you can see, around the world at the moment, All of our markets are performing really well. So if we look at mining resources sector, we've got good commodity prices. There's lots of production going on. There is lots of investment still going into capital in that market. If we think about what's happening globally at the moment, governments the world over are doing what ours are here in Australia and New Zealand and pouring money into infrastructure and construction projects. globally on steel. That puts demand on iron ore. That puts demand back on coal. So we think at the moment, unless something changes around the world, that the mining resources sector cycle will probably run longer than what it normally does at the moment. So that's a real positive for us. Infrastructure and construction. We've got all of this government spend coming for the next 10 years. Again, we don't issues in those markets. You've probably seen the ProBuild situation where they've gone into administration in that construction sector. We've got a tiny little bit of exposure to that. Probably the bigger picture there is that the problem with the construction market is all fixed contract. fixed pricing contracts. So in high inflation, that creates a big problem for those contracts. And we're seeing already the market changing to having variable contracts and rise and fall. So the pro-build stuff, those building sites are shut at the moment. Someone will pick them up. That work will come back online at some point in the future. Then all of our industrial markets supply into all of these other markets, so into construction, customers, infrastructure, customers, mining. So that part of our market's going very well as well. So overall, we're pretty optimistic for the next, not just year, but probably five, 10 years that our market's going to stay strong, subject to COVID and crazy people around the world. That all looks pretty good. Our strategy we think stands up for itself now. We've been following it for the last five years. It's been evolving, but it hasn't really changed the fundamentals of it. Simply have a great value proposition and have the best service in the market to grow sales organically, have the best people, and we're more and more able to get those into our businesses with demonstrating success and improving our culture, and then do those safe acquisitions to support the growth. So the strategy, it survived COVID. We feel comfortable with it. We think it will continue to work. And then the third component to our success really is our people. In the early days, you know, Rob and I had to try and beg people, were you to come and work for us? These days, we're a more attractive place for people to come and work. Retention is difficult in the current environment, but overall, we're improving the calibre of the team all the time at the moment. Probably one other call out for the next 12 months, maybe longer, is we now expect for the first time in the last 10 years to see some decent sort of wage inflation as well. So we'll be budgeting FY23 at about 5% wage inflation, about 4% cost inflation, whereas we would normally have been 1.5% to 2%. But we will just simply pass that through to customers where the costs are doing business increase and we're confident in the current environment we can get those through. So there's a whole lot going on in the macro, a bit going on in the micro environments there that are going overall good markets, strategy working, good people executing on that, and we're pretty optimistic about the future at the moment. So, Sam, I'll just pause there and see if you've got questions or others have got questions.

Yeah, thanks, Robert. Very good summary. I'll open up to the floor to start with, and then I can... chip away at some questions if there's not much bait. I'll just kick off then, Robert. I think that what stands out, as you pointed out, is that quite staggering trade distribution growth or organic growth of 12.5%. I suppose that's the driver of Coventry, is that division. So can we continue to see that sort of growth in the second half? Are you expecting that that's a sustainable level of uptake? I know you guys have invested heavily in a sales force. Is that sort of the lift we can get in the second half again?

So there is a little bit of skew from a seasonality perspective to the first half. There's three months in the year, December, January and April, which are lower sales months due to holidays and just the way things play out. So, you know, you don't do 1.5 times two equals three to get the year resolved. But look, we do expect positive growth in that KAA business in the second half of the the year as well and another strong performance from them. And then that should just keep accelerating from that point on. We've basically, as you know, we've set that business up for sustainable profitable growth the whole way through. So we've invested a lot into people in the branches, into inventory, into a vehicle fleet and all those things. What we've got at the moment can sustain a $100 million to $120 million turnover business. So we don't have to put a huge amount of extra cost into it. So the sales we're getting are good margin now, float to the bottom line. Whereas our other three businesses are more mature. They're all over that 10% plus EBITDA target. So I wouldn't call them in maintenance, mate, because they've got great growth opportunities, but we have to keep reinvesting back into those businesses at the moment.

Yeah. So I suppose the run rate on the KIA business now in terms of earnings is getting close towards 3 mil, right, at the EBITDA line. I might refer that to Rod, but I know you guys are targeting at least 7.5 mil from that business over the mid-term. Do you have a target on when that might be achieved or is it before FY24 that you're looking to get that back to those levels?

I think FY24 is the year to get to that level. Okay. Our competitors don't just let us waltz in and take the business. We've got to fight for it and we've got to hang on to it and they'll come back at us. But look, our service proposition is better than our competitors now. So that's the big change that's happened over the last three, four years.

For sure. And we can see there's no shortcuts in terms of the gross margin that you guys are getting. Whereas I think some of your competitors, mainly in New Zealand, sort of seem to discount. Is that what you're sort of seeing in the market? Are you seeing some irrational pricing from some competitors to take you guys on?

In New Zealand, absolutely, because most of the competitors are really struggling over there now. Mike's taken a lot of market share off them over the last sort of years. Down in Tassie, they attacked us a lot post-acquisition. That sort of has gone away a bit now, so I'll just call it a normal competitive landscape down there. On mainland Australia, during parts of COVID, we've seen some unusual behaviour where people have not had enough stock or had too much and then done silly things to try and tidy it up because they don't have the same ability to use debt or whatever it is like we have to manage that. But overall, we're finding at the moment in a price inflation environment, a bit surprising to us that we're actually creeping our gross margin, our product margin a little bit at the moment.

Great, great. Thanks for that. Could you just give us maybe an update on NADCO as well? I know you did briefly, but is that still shooting the lights out? Is that the main driver of trade distribution, would you say? Or how do you break up the...

Yeah, so the reality is if New Zealand hadn't have lost that, hadn't been shut down for that period, all three would have had a great first half. So, you know, NAVCO have had very, very strong results on the back of a very strong result in FY21 as well. Again, they've got... So we've got the best expertise to help the customers. We can compete easily against the Bunnings and the Mitre 10s, the Total Tools, the fasting businesses. It doesn't really matter. We can compete against each of those. There's a Bunnings store across the road from most of our branches. They just can't help their customers because they don't have the expertise. Half the time they'll end up sending them to us and then they won't go back to Bunnings again. It's a strong value proposition. We've got that interesting mix of products, the steel, the fasteners and all the branded and ancillary product. And, yeah, it's just a good business in a good market at the moment. That market's performing very well for us. Now, what we hope to do, we're looking at a few targets at the moment to try and replicate what NUBCO does in Tassie region or Australia, and there's some interesting opportunities out there.

Are there any locations you're targeting, Rob?

We'd probably prefer, if possible, to do something in regional Victoria, only because it's closer to the guys in Tassie, so it's easier for them to get there and assess and make sure we go about it the right way. But if we found something nice somewhere else, we would still look at it. Cool, cool.

I might just flip over to fluid systems. I mean, it's the result for the labour costs. We've seen that across the market and, you know, it's probably even more so, or the cost inflation is even more so, and I think it's caught out a number of people in the market, myself included. What does that margin look like going forward? Has it sort of come down from 12.2% and you see that there was that... big order was at a high margin. So it's 9.8% in the first half. Can you sustain that or is it going to step down again further, do you think?

No, we can get that back above the 10 again. We won't get up to the 12s, but it should sit somewhere between 10 and 11, that business.

Okay. Okay.

But for us, anything that can't get 10, it's not what we do. This business can definitely keep the 10% plus.

Okay, great. Thanks. And so for context, you guys did $64 million of revenue in the first half 22 versus 55.7 in the first half 21. I think that points towards, and correct me if I'm wrong, I think that points towards relatively flat organic growth because I was expecting maybe $10 million to $11 million of acquisition growth in there. Am I right in saying that? And will that grow again, do you think?

Yeah, excluding the acquisition stuff in there, it was relatively flat. You did have to try and find enough stuff to replace that big order. Moving forward, once we can get more labour, we'll be able to start accelerating that growth within the end. When you think about our business, we're one of the largest in our markets, but still would have less than 5% market share. So there's so much more out there to give.

Yeah. And are you replicating at least earnings on HIS, HOS and FPS? How are they tracking in terms of... Integration.

Yeah, so HIS is going okay. Fluid Power Services, Danny Tassie, is also shooting the lights out down there. Great. Cool. If we could do that, if we could keep getting acquisitions like that for 2.1 times, we'd be delighted.

Yeah. It's hard to believe, really, hey. So I suppose going forward, there's a reasonable assumption to sort of hold revenue there while we're still seeing these shortages of labour and then over time you'd expect to see some growth?

Or are you more bullish than that in terms of... No, look, I think somehow I'm really constrained by the inability to get as much labour, quality labour, as we would like. But we've got some big projects on the go at the moment. We've got some big quotes out there. There's still plenty of activity in our markets.

Great, great. Thanks. And I'll just switch to the outlook. You guys flagged possibly three store openings, and that's the first time that I think anyone at Coventry has in over four or five years, you know, returning to that store opening strategy. What's the reasoning behind Rockhampton and Macargo and Palmerston North? Is that looking to get into ag, or what are you –

So those two in New Zealand are just towns that are large enough for us to operate in successfully that we don't have a presence at the moment. Palmerston North, we've now got a rep there building up some sales before we open that location. So these are really just straight geographical build for us there. Rockhampton, to be honest, was opportunistic. One of our competitors, Motion Australia, who bought a Fastness Business Global Fast and rebranded it to SpecFast and then were just driving the team into the ground. The team literally walked out and said, we've had enough, can we come and work for you? So that was the drive behind opening that branch.

Okay, great. Thanks very much. And what sort of store opening growth are you expecting over the next term? Are you going to continue opening up new places?

Yeah, there's probably only two or three more options in New Zealand. There's lots of options in Australia. I think it'll depend a bit on what happens from an acquisition perspective as well and how many locations that we don't have we can fill via acquisition. It does take a lot longer to get a greenfield operation up to profit than what we'd like, I guess.

Okay. Great. And you'd be expecting to target small metrics of over 10%?

The stores to cover the central costs from the Connect business need to be more like 15%. Okay, cool. And we've got some branches that bump out 25%, which are others that aren't making any money.

And do you think you need to upsize any existing stores or rationalize some stores? about the network as it is right now.

Yeah, so Rob, you might answer that because we've got a number of upgrades at the moment, including one that's got a new swimming pool.

Yeah, that's unfortunate. We recently did a renovation and upgraded Lismore Branch. This time yesterday, it was under two metres of water. So that's a bit of a setback. But look, we're also, you know, with Art Harman, we're in the middle of, we've relocated that and we're making it a bigger branch. It's a better location. So for us, that's always the play. Have a look at the market, have a look at our locations. Is it right? At the right time, do we just move it a little bit and get a bigger footprint? So we're really thinking a lot more about merchandising. leveraging off our learnings from NUDCO. So when we get the opportunity, we do it. We're not just throwing money at these things. It's got to all sort of line up. And we can only absorb so many at a time. We don't want to make mistakes along the way. So they're well thought out. We've got a program of upgrades that we want to make. And, yeah, we just keep pecking away. We've got the dedicated resource in KA that just supports those moves and upgrades. So we've got it down to a fine art now, which makes it easier for us.

Great.

Thanks, Rob.

And just going back, what the previous management and the business have done is downsize all the stores, put them in the back streets of a town. take all of the product and the merchandising out. So we're just really, as we see the opportunity, reinstating them back to their former glory, if you like, so that they've got a real chance of success. And then it really, at that point, just comes down to getting the right people in them.

Yeah, yeah. So it's still that long process of restocking and upsizing.

Yeah, okay.

Do you have any... How is your online presence looking at the moment? I know we're getting close to the end of time, but can you maybe comment on how your sales there are progressing?

Yeah, so that's been probably slower than what we would have liked. The business had no e-commerce capability when we inherited it. It wasn't our initial priority because we just had to get the store networks and a whole bunch of other things fixed up. And our system with the master data, the way it was and everything, you couldn't do it. So we did get a little caught out there because we'd have loved to have it all up and running at the start of COVID. Those sites are all coming up online now. The ATIA sites in Australia and New Zealand are starting to generate sales. The Connect ones, we will see some growth out of that towards the end of this financial year and into next financial year. It's still not our main, it's probably not going to be our main go-to-market for quite some time. It's still very much a direct selling model that is best suited to the customers that we've got at the moment. But as the population changes and ages and more young people come into trades, they will trade more that way.

Great. Is anyone in the market that you see doing it, because it makes sense that it's a go-to-market. You have to be on-site, and that's the value prop, getting your expertise on-site. But is there anyone that does it on the market?

So Blackwoods do a lot of their business online, but what they've also done is lost a lot of business that way because they've tried to force all their customers onto it, and they didn't want to do that and went somewhere else. So we're not going to take that approach. We'll encourage, if it makes sense, to get a customer on if that's what's going to work for them, but we won't force them. Okay. Great. We've got to deal with the customer the way the customer wants to be dealt with.

Fantastic. Okay. I'll just open up the floor again as I realise I'm taking up everyone's time to see if there's any more questions.

Yes, Sam. Good morning, Rob. It's Lionel, man. Hi, Lionel. How are you going? Good, thanks, pal. A quick one. Of the residual issues that you inherited, you and Rod, what are left? I mean, can you give us a rundown of the property issue over in WA and how that's panning out, the systems issues that you inherited? Can you just give us a rundown? How many legacy issues do we have left and where are we with those?

So you've probably highlighted the two key ones there. We've largely got past all the people issues. We've got the fleet, the infrastructure's been rebuilt. So we're well on the path there. The system is still problematic for us, but what we've been doing is attaching things around it to help us Get what we need out of it. We put a business intelligence tool around it, the CRM, all the e-commerce stuff's just been attached onto it with up-to-date technology. At some point, we will have to upgrade the ERP system, but that's still down the track a bit. The property, Rob...

The property over in Redcliffe is probably in the best state that it's been in a long time. So effectively, we've got it occupied fully. That doesn't mean it's occupied fully, you know, through to the end of the lease. We've got Main Roads. They're one of our tenants. Their lease is up for renewal in October of this year with a five-year option. You know, we think that they're fairly comfortable there, but you never know. So we work hard to make sure we retain them. Last year we announced Macintosh as a key tenant in our warehouse. Again, they've got a lease that goes through to August 24 with an option through the end of the tenancy. Likely they will renew. But there's always those things in the background. It's not a distraction for us anymore. We sort of put that aside and we just work it hard and make sure that we can keep it fully tenanted. So that's a good thing because that was a real distraction for many, many years.

So only six years to go on that lease, Lionel, and for the others on the call here, we inherited a property with a 20-year lease on it that had a couple of sub-tenants in it, but not many, but was burning probably a million and a half dollars in our back pocket at that time. So it's pleasing to have a few more tenants in it now.

Thanks, guys.

Thanks, Lionel. If there's no more questions, I think we might wrap it up there, guys. But Robert and Rob, thanks so much for taking the time to present to us today and congrats on such encouraging results, particularly in that Connect Australia business. I think that's what everyone's looking at at the moment. And best wishes for a second half and we'll catch up again soon.

All right, great. Thanks for your time, everybody. Thanks, Rob.

Thanks, Rob. Cheers.