Coventry Group Ltd

I would now like to hand the conference over to Robert Bullis, Chief Executive Officer and Managing Director, and Rod Jackson, Chief Financial Officer of Coventry Group. Please go ahead.

Thank you. Hi, everyone. I'm Robert Bullis, the CEO and Managing Director of the Coventry Group, and we also have our CFO, Rod Jackson, on the call today as well. So today I'm going to provide you with an update on a number of areas. The first is our half-year FY24 financial results, talk about how our markets are trading, go through our key strategic initiatives and objectives for the remainder of FY24 and also going into the 2024 calendar year, and then also talk about our significant growth opportunities across all of our business units. There will be the opportunity for questions at the end of the session. So first of all, to the half one FY24 results, our training performance improved again during the period with continuing sales and pre-AASB 16 underlying EBITDA year-on-year growth. So any reference I make to EBITDA during the teleconference will be to underlying EBITDA pre-AASB 16 and before significant items, which in this case, those significant items are the relate to the ERP upgrade. Pleasingly, we're on track to deliver our seventh consecutive year of sales and EBITDA growth, despite the many challenges we've faced during our journey today. With continuing profit growth, completion of the ERP system upgrade in calendar year 2024, and the availability of tax losses in Australia, our debt position is forecast to reduce quickly in FY25, placing us in an excellent position for future growth. Key highlights from the first half of FY24 are the sales up 5.4% to $185.3 million and very positive EBITDA growth up 18.1% to $9.8 million. The initiatives to grow EBITDA percentage to sales to 10% in the medium term delivered positive improvement. These buy-side and sell-side initiatives were implemented early in the financial year and the run rate from these initiatives improved over the second quarter with Q2 EBITDA up 28.9% on the previous year. We did report a small statutory net loss for the year, really due to the investment that we're making in the ERP upgrade. The cost churn for that project at the moment is at its highest level and will start coming down as the year progresses and back to zero by the end of the year. Balance sheet remains strong. We've got net tangible assets of $35.8 million and net assets of $112 million. Net debt up slightly at $37.1 million. This was up a bit on last year, 30 June, but not a bad result when we consider that we had $5.4 million of spend in relation to the ERP project and another $2.1 million for our normal capital expenditure. These results of positive sales and profit result were achieved despite a number of factors influencing us externally. The first and the main one is the New Zealand economy has definitely weakened due to the recessionary environment over there. And that's having a short-term negative impact on our New Zealand operations. But as a small and dynamic economy, we expect it will bounce back strongly. So far, February sales have been quite encouraging. We've seen price deflation on steel products and a reduction in discretionary spend due to the higher interest rates in Tasmania, which is impacting our NUBCO business unit. Again, we expect NUBCO to bounce back strongly as the year progresses. The high wage inflation environment has continued. Cost inflation is back at normal levels, but we have seen high wage inflation That's particularly impacted the trade distribution business units. The fluid systems business unit is able to pass on a large part of that inflation through labour recovery rates. And finally, labour and skill shortage is still an issue for us in the fluid systems business. It's constraining some of our growth there, but also adding to higher costs because we need to use quite high levels of overtime and also higher labour. From a business unit perspective, sales in trade distribution up 2.2% to 107.7 million. EBITDA slightly down by 0.6% to 8.5 mil. Really pleasing. Connect and RT Australia performed very well with sales up 9.3%. And EBITDA on a lower base dollar profit level up 89.2%. And that was then offset largely by the performance in New Zealand where the markets are particularly difficult and to a lesser extent down in Tassie. But overall, really good and pleasing growth story in the Connect and RT Australia business. In fluid systems, a very, very good result. Sales up 10% to $77.6 million and EBITDA up 24.1% to $9.4 million. Another excellent result, particularly considering it was curtailed by labour shortages. Corporate costs at 4.4% of group sales. That's down from 4.6% last year. All business units were able to improve trading and gross margin results during quarter two. Our buy-side and sell-side initiatives will continue for the remainder of FY24 with further gains achievable. To date, we believe, or the numbers tell us, that we've achieved around a 2% improvement in our gross margin in the first half of the year. So a really, really pleasing result from that initiative. Our sales and profit results for January were ahead of the previous year, and we expect the positive momentum of the first half to continue into the second half. So that's a bit about the results. Moving on to the outlook for our markets, we're still cautiously optimistic that all of the market segments will operate well and continue to perform and therefore expect the group to continue to grow profitably. Obviously New Zealand economy down at the moment and we are impacted there by our greater reliance let's say on the residential construction market but we do expect to see improvements there. In our primary end markets of mining and resources, infrastructure, commercial, construction and industrial, we consider that they'll continue to perform as the year goes on. So starting with mining resources, there's continuing strong demand for products and services in that market. Commodity prices remain solid. We don't really have any exposure to the nickel market. market, which is obviously down at the moment. So other than the labour and skills shortages, we see continuing growth in that market for us. We expect the infrastructure sector to continue to perform strongly. There's consistent government spend over the next 10 years. We've continued to build our capability, our value proposition to support that market, and we're continuing to win new business there. So a very good market for us and one that we targeted a number of years ago as a growth sector. Moving to commercial construction, that market continued to perform well despite cost inflation and labour shortages. The number of business failures has reduced. It's still happening, but again, in large, when they do fall over, another company comes in and picks up the work and picks up the workers. Most of our major customers continue to report solid order books and projects for the future. In Australia, we've got limited exposure to residential construction with a more significant impact in New Zealand in the roofing sector. We have a much larger roofing screw market there. But look, that decline in residential market spend we believe will come back. There's housing and rental shortages combined with immigration in both countries and we expect that to drive demand for medium and high density living, which is a greater opportunity for us in any case as opposed to single dwelling construction. Industrial and manufacturing markets are driven by the activity in the other markets we serve. They're all continuing to perform well. And then our secondary markets, which are target growth markets of agriculture, aquaculture, transport, renewables, oil and gas, defence and recycling, all continue to perform well and be a great opportunity for us, particularly for fluid systems where we look to diversify out of the mining resources sectors. So look, markets overall performing well for us and as always, we expect them to do better than GDP. So moving on to our key initiatives and projects, the activities to improve EBITDA margins to 10% are already delivering positive outcomes. In this area, we're looking at our organic growth story and we've got a number of initiatives there. We've got all of our business units focusing on improving the trading and gross margin. And those buy side and sell side improvements will continue in the second half of the year. On top of that, we manage cost sensibly and make sure that where we trade down, we're super careful. And as an example, if we have people leaving, we try and not replace them until the market comes back to us. We're continuing to accelerate growth in KAA. Last week we opened our 42nd store, a new store in Yatala, which is in between Brisbane and the Gold Coast. And we've got our 43rd store set to open in March. We're continuing to drive our program of store makeovers and relocations. Combined new stores, store makeovers and relocations We'll do 12 of those, complete 12 of those in FY24, and we've got a similar program set up for FY25. Wherever we do those store makeovers and relocations where we've got the right team, we get immediate improvements to sales and profitability in those stores. The ERP upgrade project continues to progress well. key objectives of this project are to substantially improve our customer service levels and the productivity in the business so to achieve that we've got a very experienced project team project partners and dedicated subject matter experts running the project to date we've completed the build and configuration phase and two rounds of testing we will do a minimum of three more rounds of full end-to-end testing, including testing with all of the external systems that we use. And the aim at the end of that testing will be to do a go-live in a pilot branch mid-year. We'll then roll out to the other branches in batches with the aim to complete the rollout by the end of calendar year 2024. And as the year goes on, Monthly cost of the project, which over the last four or five months has been close to or around $900,000 a month, will start to reduce and end up at zero at the end of the year. The last thing is our inventory optimisation project. That did slow in the first half of FY24 as we focused on the margin play, but we'll accelerate that again in the second quarter of FY24. And once we have the new ERP system, that will make managing inventory a lot easier for us in the future. So the last thing I wanted to touch on was just the growth opportunity for the group. In both our trade distribution and fluid systems markets, we have at best 5% market share. Our markets are ripe for consolidation through both organic growth and acquisitions. Specifically in our trade distribution markets, our key strategic growth initiatives are increasing share of wallet with existing customers and winning new customers through our value proposition based on specialisation. So that's quality products, high stock availability, the expertise we can provide our customers and our really agile service. Increasing market share through new branch openings, branch relocations and branch refurbishments. So over time we believe there's an opportunity to rebuild a network of 100 Connect branches in Australia, 20 plus in New Zealand and expand NUBCO into regional Australia. And remembering in the group's heyday we did have 100 fastener branches in Australia and look to validate that opportunity. Just looking at New Zealand, we have 20 stores there, around $50 million of revenue, whereas in Australia we've only got the 42 and around $100 million of revenue. So it does indicate that the 100 stores and $250 million of sales are achievable over time just based on the population in the two countries. We've also then got the ability to enhance our sales and marketing capability. We've now got a marketing team in place and also building digital capability around online stores, vendor managed inventory and other things like that. In fluid systems, the key strategic growth initiatives are expanding sales in existing markets, diversifying into markets outside of mining and resources, expanding or relocating facilities to accommodate growth opportunities, increasing our engineering capability and developing expertise to take advantage of the move from manual processes to automated and electric systems, exploring options for branches in new geographical regions and exploring acquisition opportunities in a fragmented market. So from a group perspective, the strategic priorities for FY24 and beyond ensuring we've got the right people for growth, critically important to our success. Our target, 10% EBITDA initiative, which encompasses our trading and gross margin activities, sales growth and sensible cost control, accelerating organic growth and improving margins in Connect and Artea Australia and moving towards that much larger branch footprint, focusing on right-sizing inventories and cash conversion, delivering the ERP project by the end of this calendar year and continuing to reinforce with customers our focus on specialisation. So we've done a lot of work on the business. We've built it back up to have the infrastructure and the capability to grow. And our job now really is to leverage the scale benefits of the platform that we've established. And in particular, get our trade distribution business and connect them up here up to best class margins. So in summary, we are operating in very, very big fragmented markets with very small market shares. We've got very clear plans for accelerating profitable growth. We operate in the right markets. We've got a successful strategy that's delivered six years consecutive sales and profit growth and is on track to do the same again. And we've got the right people to execute on that strategy for us. We're looking forward to getting behind the ERP project, getting the obvious benefits from that investment, but then growing profit, taking advantage of the tax losses that we've got and delivering greater returns to shareholders. So that's it for me. I'll hand back now to see if there's any questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Ken Wagner with Petro Capital. Please go ahead.