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 the Coventry Group. Please go ahead.

Thank you. Hi, everyone. I'm Robert Bullis, the CEO and Managing Director of the Coventry Group, and I also have with me Rod, our CFO. So today I'm going to cover off on the following areas. Firstly, the results for FY24. Secondly, an update on how our markets are trading. Third, updates on our key strategic initiatives. And then finally, just a bit of a discussion around our growth opportunities across the business units. At the end of the session, there will also be an opportunity for questions. So firstly, to the FY24 results, our trading performance improved during FY24, delivering sales and pre-AASB16 EBITDA year-on-year growth. Further references I make now to EBITDA during the teleconference will be always to EBITDA pre-ASB16 and also before significant items. Very pleasingly, this is our seventh consecutive year of sales and EBITDA growth. Key highlights in the FY24 results were sales growth of 3.4% to $378 million and positive EBITDA growth up 22.4% to $20.8 million. The buy and sell side margin initiatives that we put in place last year had a big impact on that result. Statutory net profit for the year was $700,000. This was lower than the previous year, but largely due to the $9.1 million of investment into our ERP system upgrade. The ERP project is progressing well. More detail on that later. but we currently have 11 of the fluid system branches and our pilot KNZ branch live, along with finance. We also completed the acquisition of Steelmasters, creating a larger and more profitable specialist fastener business across Australia and New Zealand. The board has declared a fully franked dividend at 3.75 cents per share. This is our fourth consecutive dividend, and our aim is to maintain dividend payments as long as the business has the capacity to do so. The balance sheet remains strong. We have net tangible assets of $34.7 million and net assets of $143.1 million. For the second consecutive year, our working capital management delivered a strong cash conversion rate this year at 112.1%, just slightly less than the previous year at 112.5%. Net debt at $47.3 million, up on the previous year, but a good result as we outlaid over $13 million for the Steelmasters acquisition on top of the capital raise, $9.1 million for the ERP project and $4.5 million for capital expenditure. With the ERP project, we've got around $3.3 million of spend to go and we're expecting a slightly higher CAPEX run rate during FY25 due to the steel masters business coming into the group and also our store build program as we continue to accelerate that. On top of our $55 million NAB financing facility, the NAB also provided us with a new revolving cash advance facility of $25 million to accommodate acquisitions. So we're getting great support out of the NAB. The positive result was achieved despite external factors, including interest rates impacting discretionary spend and construction and housing markets, continuing high wage inflation, which is now levelling back out again, still price deflation, which has also levelled out, ongoing labour and school shortages forcing us to use high levels of overtime and high labour and fluid systems, and of course the double-dip recession in New Zealand. And later in the financial year, slowing activities on the eastern seaboard of Australia. We do expect the market softness currently being experienced on the east coast of Australia and in New Zealand will be short-lived. From a business unit perspective, Fluid Systems had another very strong year with sales for the year of $159.2 million, up 7.5% on the prior year. Fluid Systems EBITDA was up very strong, 23.5% to $19 million, compared to $15.4 million in FY23. Trade distribution had sales for the year of $212.1 million, up 1% on the prior year. EBITDA was down 1.3% to $16.8 million compared to $17 the previous year. And within that, a positive result in Connect and Artier Australia was offset by the Connect and Artier New Zealand and Nubco results, which were down. Corporate costs we lowered to 4.3% of group sales from 4.6% of group sales the previous year with our target there being 4%. So moving to the outlook now for our markets moving forward. The businesses within each business segment continue to successfully provide specialised industrial products, services and customised solutions to our customers throughout Australia and New Zealand. As I mentioned earlier, we expect the market softness currently being experienced on the east coast of Australia and in New Zealand will be short-lived. In the meantime, we continue to focus on what we can control in the markets where we have single-digit market share. Our emphasis on specialisation is the key to this and is underpinned by our customer value proposition of quality products, stock availability, expertise, agility and our growing branch network. For our fluid systems business unit, demand remains robust for our products and services and we are seeing little negative impact on this business unit. The work to increase our engineering team and customised solutions has opened new markets for us. We expect our key markets of mining resources, manufacturing, recycling, transport, agriculture and defence to continue to perform. And I guess to sort of pre-empt potential questions around the... talking the media at the moment about China and the mining resources sector. It's worth pointing out that the miners that we deal with are blue chip and have blue chip mines. These mines don't close, have a very low cost to extract, so we don't expect any real impact there. On top of that, as we speak at the moment, we can't keep up with the available work. That's been the case for some time. We do significant levels of over time and we are also reducing our exposure over time to that mining resources sector. So we're increasing our growth into other sectors, we're increasing our engineering solutions capability, and we're taking advantage of the move to automation and electrification, which goes across all of the market segments that we operate in. So we remain positive about that market. For Connect and RT Australia, demand is, different by geographical segment. We've still seen demand in WA to be positive. For a slowdown in Queensland, that's now heading back to normal. It is slower in the other seat board states, but we expect that to improve in the near term rather than the long term. For our ConnectNRT New Zealand business, the economy over there has been challenging. Reduction in sales there has been a lot less than many other businesses in our sector. We think that shows the strength of our operations there. As that economy bounces back, as they reduce interest rates, we expect that to trigger orders for projects that we're currently quoting. And overall, our view is the economy will improve over the financial year and we expect to return to sales growth year on year in FY25. Our Nupco business has struggled due to increased competition in the steel and power tool markets, combined with deflation on steel products. We continue to work on a strong value proposition to win a greater share of the market and are increasing our focus on the faster market in Tasmania. So by sector, mining resources, the sectors we're in and the commodities we play in, we think those sectors will continue to perform. There's still a lot of infrastructure projects to continue to support the economy. Commercial and residential construction markets will improve once interest rate relief and inflation is back at normal levels. Our core industrial and manufacturing markets will improve as activity increases in the other markets we service, and all of our secondary markets, which are very big growth opportunities for us, continue to perform well. So these markets include agriculture and aquaculture, renewable energy, oil and gas, and defence and recycling. So moving into some of our key initiatives and projects, the most important one, of course, is the ERP upgrade project. The project at this stage is progressing very well. The key objectives out of this project are to improve customer service and to improve productivity. Microsoft D365 is a leading edge technology with the capability for us to continually take advantage of improvements being made to the system. We've got a very experienced project team and project partners and dedicated subject matter experts from the business running the project. I'm very pleased at this stage to advise that we've successfully migrated 11 of our 15 fluid system branches successfully onto the system. with very limited impact on trade. And as of Monday, we now have our pilot Connect and RT in New Zealand site live and operating with no impact on trade there as well. In addition, our finance team are now operating on D365 and the other systems, in particular Oracle, so we're running a dual function there at the moment. They've managed to close the first month in with no issues All key functions are working as planned. We can pay our bills. We can transact with the banks, through EDI with our customers and suppliers. All of those key operations are working. So at this stage, our confidence grows as we tick off each project milestone. The next stage is to bring the final fluid systems branches onto the system. Then we'll bring the rest of New Zealand on with the last stage moving back to Australia to bring our Connected and Artea Australia branches on. So at this stage, we're still on target to complete the project in December 2024, largely on time and on budget. The other big initiative last year, as I mentioned earlier, was our buy and sell side margin initiatives. These had a material impact on our ability to grow profit during FY25, despite slower sales growth. Those gains will be maintained through FY25, and there is some further rewards there in the KA business and of course as the markets come back to us and we get back to stronger sales growth, those sales will be at those higher margin levels as well. So still some further work just to finish off the buying benefits that flow from the Steelmasters acquisition and also some further sell side initiatives. Another key area of focus is accelerating profitable growth in our Connect and Artea Australia business. We've worked on multiple fronts including fixing underperforming branches, delivering store makeovers, store relocations and new stores. Our two new stores in Yatala and Karratha both had profitable months in July and we've also seen improved margin management and improved supply chain and marketing capability in that business as well. So we continue to repair the damage of the past and remain confident that we can build that business up to the 100 store level that we've been promising. From a debt management perspective, our focus on inventory and debtor management and sensible investment in capital expenditure resulted in that cash conversion result of 112.1%. And as I said earlier, that's the second consecutive positive result there. The investment in the D365 project and the technology that we get from that will provide us with more opportunities to improve stock availability and also reduce inventory levels across the business or stock days across the business. So we look forward to getting that in, getting it properly configured and taking advantage of that system moving forward. The last thing I just want to touch on again is the growth opportunity for the group. For FY25, sales growth is going to be our key priority and our key initiative. Trade distribution and fluid systems business units have at best single digit market share. Our markets are ripe for consolidation through both organic growth and also through acquisitions. So in trade distribution, the key initiatives there are again increasing share of wallet with existing customers and winning new customers through a value proposition based on specialisation and at superior customer service levels. We'll then also aim to open two to three new stores across FY25, do a number of branch relocations and also branch refurbishments, which will get us closer to having the entire network in the shape that we wanted. Wherever we do these relocations or trades or upgrades, we pretty much immediately see a return on that investment with increased sales. So it's been a very positive program for us. It is absolutely critical for success that we have the right branch manager. When we get the right branch manager, they get the right people in and that's a key element for success. The Australian business, as I said, we want to get that up to the 100 branches plus and we're also looking at getting to 25 plus in New Zealand. If you have a look at our Australian business size compared to New Zealand and look at the population between Australia and New Zealand, We absolutely should have a business that's twice as big as what it currently is in Australia. We'll continue our initiatives around improving trading and gross margin. We will continue to enhance the capability in our sales and marketing team, and we're also building digital capability with a go-live imminent for the NAPCO online store. And then we've got D365 coming, which will improve our customer service and productivity. It'll make us a far more attractive place for people to work with the cutting edge technology and really will make it quite difficult for our competitors to keep up with us at that stage. In fluid systems, we'll continue to expand sales in our existing markets, but also look to diversify into markets outside of mining and resources. We have some work to do around expanding and relocating facilities to accommodate growth, continue to increase our engineering capability and develop capabilities for the move from manual processes to automated and electric systems. This is a paradigm shift in the market. We're at the leading edge of it and turning it into a positive paradigm shift for the business. We've also got some options for branches in new geographical regions as well for the fluid systems business. And then, of course, on top of that, we'll continue to look for acquisition opportunities, but only highly profitable businesses that are an exact match and fit for our existing core operations. From a group perspective, strategic priorities for FY25 are ensuring we have the right people for growth, accelerating organic growth and improving margins, particularly in trade distribution, continuing to focus on right-sizing inventories and cash conversion, delivering the remaining stages of the ERP upgrade project to schedule and budget, and reinforcing the customers' focus on specialization. We remain committed to leveraging the scale benefits of the platform established over recent years in all parts of our business. In summary, the group operates in multi-billion dollar fragmented markets where we have single digit market shares. We've got clear plans for accelerating profitable growth. We operate in the right markets, have a successful strategy and have the right people to deliver sustainable profitable growth. So thank you. We'll now answer any questions you have.

Thank you. If you wish to ask a question, please press star one 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 using a speakerphone, please pick up the handset to ask your question. Your first question comes from Daniel Island from Petra Capital. Please go ahead.