Microba Life Sciences Limited

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

Great, thanks Darcy. Good afternoon everyone and welcome to the Coventry Group's FY25 Half Year Results teleconference. I'm Robert Bullis, the CEO and Managing Director and I also have with me our CFO Rod Jackson. So today I'll be providing you with an update on the Coventry Group's first half financial results, our key strategic initiatives, how our markets are trading and the substantial growth opportunities our business units have. There'll be an opportunity for questions at the end of the session. Any references I make to EBITDA during the teleconference will be to EBITDA pre-AASB16 and before significant items. So firstly to the FY25 half-year results. After many years of investment and repair work, the completion of the Microsoft D365 ERP implementation and related investment marks a significant milestone in the group's history. The group is set up for long-term success with the people, equipment and technology required to accelerate our strategy focused on delivery of profitable sales growth and achievement of our medium-term objective of 10% EBIT data sales. The group is well established position to take advantage of expected improving economic conditions in both Australia and New Zealand in 2025 on the back of interest rate cuts. The FY25 half-year result was delivered against a backdrop of difficult economic conditions in some jurisdictions and the destruction of the ERP upgrade go-lives across 73 branches. We estimate in excess of 10,000 hours went into the project for training alone. Significant hours were also committed by the leadership team, people within the business and the project teams during the go-live period of the project. We look forward to now having our teams back fully focused on delivering profitable sales growth in 2025. The key points in the FY25 first half results were group sales of $185.2 million in line with last year. and EBITDA growth up 0.8% to $9.9 million. The statutory net loss for the half of $700,000, this was impacted by implementation costs in relation to the D365 ERP system implementation. We are not expecting any further material costs in relation to this project which we expect will lead to improved net profit results in the second half of the year. Our recent acquisition, Steel Masters, has continued to perform to expectations. The acquisition has also provided us with valuable pricing insights that are allowing us to further improve trading margins in our Connect Australia operations. As in past years, the Board has determined that no interim dividend be declared. Our aim is to maintain dividend payments as long as the business has the capacity to do so. At 31 December 2024 the group had net assets of 140.8 million, current assets exceeding current liabilities by 31.5 million and net tangible assets of 32 million. Net debt at 31 December 2024 was 52.9 million. This was higher than planned but was impacted by some larger customer payments which were not received at the end of the half as expected but were collected in January. and the balance of the ERP project costs. Net debt will be positively impacted in the second half with the ERP upgrade behind us and the availability of tax losses in Australia. From a business unit perspective, Fluid Systems had sales for the half year of 73.3 million, down 5.4% on the prior year, and EBITDA down 23% to 7.2 million compared to 9.4 million in the first half of FY24. Fluid Systems bore the brunt of the ERP upgrade being the first business unit to go live and as such suffered the greatest distraction. We're expecting Fluid Systems to bounce back strongly in the second half with a solid pipeline of orders in place. Trade distribution had sales for the half year of 111.9 million, up 3.9% on the prior year and EBITDA up 19% to 10.1 million compared to 8.5 in half one FY24. The result was positively impacted by steelmasters, which offset some short-term softness in our Connect New Zealand and Numco operations. Connect Australia had a positive result with EBITDA up 23.6% on last year. We also expect our trade distribution businesses to deliver better second-half results. Corporate costs at 4.3% are closing in on our target of 4% to group sales. I'll now move on to updating you on some of the key initiatives and projects around the group. Firstly, to the ERP upgrade project. We're very pleased to have completed the ERP upgrade go-live stage with all business units in scope now operating successfully on the system. The ERP project has been completed broadly to plan, schedule and budget and we do not expect any further material costs in relation to the project in 2025. We're currently in the process of taking the first system upgrade, fixing some defects and configuration issues, as well as preparing to implement the first round of enhancements. The Microsoft D365 ERP system utilises the latest technology and will deliver significant customer service and productivity improvements over time. Some of these customer service and productivity benefits are already evident, but we expect further benefits during calendar year 2025 and beyond as new technology is deployed and AI tools streamline operations. Our program to accelerate profitable growth in Connect Australia is progressing well. We're on track to open five new stores in FY25. This will take us to 53 specialist fastener branches in Australia. Work on fixing underperforming branches, delivering store makeovers and completing store relocations has continued. Our Dandenong and Brendale stores are both now relocated into the right buildings in the right locations. Our buy and sell side margin initiatives that we implemented in FY24 have been maintained. Further activity continues, taking advantage of the pricing insights we gained from the Sealmasters acquisition and combining spend across business units to increase our direct import volumes. From a debt management perspective, our focus on inventory and debt management and sensible investment in capital expenditure continue. The investment in the D365 technology will provide us with opportunities to reduce stock days whilst at the same time improving stock availability. As stated earlier, the end of the D365 ERP upgrade spend combined with the availability of tax losses now puts us in an excellent position to reduce debt and strengthen the balance sheet. So moving into the outlook for our markets. We expect the market softness currently being experienced in Australia and New Zealand will be short lived. We continue to focus on what we can control in markets where we have single digit market share. 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. 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 a growing branch network. For our Fluid Systems business unit, demand remains strong for our products and services in the mining resources sector. while there is some softness in the States outside of the mining industry. We are confident with the ERP upgrade behind us, our increasing capability to deliver customised engineered solutions, growth through the market shifts in automation, electrification and Industry 4.0, that Fluid Systems will deliver organic growth in 2025. We are also investing to increase our capability to deliver specialised hydraulic repairs, and are in the process of moving our largest fluids branch in Mackay to a custom-built state-of-the-art facility. We expect our key markets of mining resources, manufacturing, recycling, transport, agriculture and defence to perform in 2025 and beyond. In Australia, demand is different by geographical segment. Demand in Queensland remains positive while there is some short-term softness in the other states. We expect conditions to improve during the calendar year and interest rate cuts as they occur to be positive for our markets. We are fortunate that Connect and Steelmasters have a larger number of branches in Queensland than other states and we expect the Queensland economy to remain strong, particularly with the build for the Olympics having a positive impact. The economy in New Zealand has been challenging, particularly given our larger exposure to the residential construction market. Overall, our view is the economy will improve over the calendar year and we expect a return to sales growth year on year in FY26. So by sector we see the mining resources sector in the commodities that we operate in continuing to perform. Our customers are blue chip miners operating blue chip mines. Infrastructure projects to continue to support the economy with new announcements being made leading up to the federal election in Australia. And we also expect government spend in New Zealand to increase leading up to an election year in 2026. The commercial and residential construction markets to improve with interest rate relief and inflation at normal levels. Our core industrial and manufacturing markets improving, driven by activity in the other markets serviced by the group. And our secondary markets to be growth opportunities for us. So lastly, I'll just go to the growth opportunity for the group. Both our 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 acquisitions. We have seen two examples in recent months where family owned fastened businesses have closed the doors. On both occasions, our teams have moved quickly to take advantage of these organic growth opportunities, signing up the customer base and employing key sales resources from these businesses. We expect further opportunities like this as our markets consolidate. In our trade distribution markets, our key strategic growth initiatives include increasing share of wallet with existing customers and winning new customers through our value proposition based on specialisation. Increasing market share through new branch openings combined with branch relocations and branch makers. We see a rapid return on investment when we relocate to the right building in the right location with the right team. We've improved our capability in this area recently with the appointment of a specialist property search firm, a design and construction firm to deliver these projects for us and we've also employed external expertise to help us map the ideal locations for our new stores. We're working systematically to build a network of 100 plus Connect branches in Australia and 25 plus in New Zealand. We're implementing a number of initiatives that will improve our trading and gross margins. We are continuing to enhance the capability in our sales and marketing team. We're building digital capability. D365 is improving our customer service and productivity. And we're exploring acquisition opportunities in a fragmented market where it would be difficult to enter a market through a greenfield start-up. Now, Fluid Systems Business Unit, our key strategic growth initiatives include increasing share of wallet with existing customers and winning new customers through our value proposition, diversifying into markets out of mining resources, albeit our current focus is on the mining resources sector where demand is strong, expanding or relocating facilities to accommodate growth opportunities. As mentioned, our Mackay operations will relocate to a state-of-the-art facility later in the year. This facility will give us the capability to deliver work that currently can only be completed in Brisbane and Sydney with long lead times. Our facility and equipment will also attract additional experienced employees. We continue investing in engineering capability and developing capabilities for the move to automated and electric systems and Industry 4.0. We're accelerating investment in equipment and people to make us a leader in specialised hydraulic repairs We're exploring options for branches in new geographical regions and again exploring acquisition opportunities in a fragmented market. From a group perspective, our strategic priorities for 2025 are ensuring we have the right people for growth, delivering organic sales growth in all business units, managing margins and sensible cost control, focusing on strengthening the balance sheet, and extracting the benefits from the D365 ERP system and continuing our path of digitalisation. We're committed to leveraging the scale benefits of the platform established over recent years. With the ERP upgrade behind us, all of our focus is now on profitable sales growth, improving all business units to EBITDA of 14% or better and reducing corporate costs to group sales to 4%. This is our equation for achieving 10% EBITDA. In summary, the group operates in multi-billion dollar fragmented markets that have good growth prospects. There is evidence confirming these markets are consolidating. We are implementing clear plans for taking advantage of this opportunity to accelerate profitable growth. We're operating the right markets, have a successful strategy and the right people to deliver sustainable profitable growth. So thank you. We'll now answer any questions you have. So over to you, Darcy.

Thank you. If you would like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you would like to cancel your request, please press star 2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Charlie Kingston, a private investor. Please go ahead.

Yes, thank you. Charlie Kingston from K Capital. Just a few questions. please. Firstly, just on the free cash flow, I know you've cited that post the end of the period you received some cash flow, but it does seem like a consistent theme whereby almost every year the free cash flow is very different to the underlying impact. I know you've had some one-offs with the ERP this year, but it does seem like there's always some sort of a one-off and I know you've got your EBITDA target of 10% the margin, but could you just talk a bit to the free cash flow generation of this business? Because EBITDA is one thing, and I'm glad you report on a pre-AASB, which is post-rent, which is great, but it does seem like the business is struggling over almost every year to actually produce free cash flow. So could you just comment on that? Now that you've spent the ERP, are there going to be any more one-offs, or can we... The shareholders expect some free cash flow generation going forward, please.

Yeah, sure. Thanks, Charlie. You know, the first sort of four years of the last eight years, the business wasn't making profit. So, of course, there wasn't much cash flow at that point. Post that, we have been reinvesting large parts of the profit back into the business to rebuild it, to get the right equipment, to get the right... buildings, vehicle fleet, those sort of things and then we went straight into the ERP project which has put a lot of strain on the cash flow. So moving forward now, we don't really have any large investment left to do other than normal capital maintenance I'll call it. So we're in the position now in our view where we should start generating cash better than normal. with the combination of increasing profits on the back of the investment we've made and improving economies, no more D365 spend, and we've also then still got $59 million of tax losses in Australia to work through as well. So we believe from this point on the business will be quite cash generative, we'll bring the debt levels down reasonably quickly, and the balance sheet will strengthen up quite well.

Okay, thank you. And you also spoke or mentioned potential acquisitions, just noting you did a pretty big one with Steel. The Steel acquisition was six or seven months ago. But is that a focus or are you more looking at actually making a nice profit off what you currently have? Because, I mean, just rough numbers, I think last year you made $20 million of EBITDA and you acquired... a business that was doing seven and I don't know what the seasonal half to half split is at the moment, but it seems like we're on a run rate to do 20 again. So it's a pretty big miss to when you did acquire that business. You know, if we're going to have flat EBITDA, notwithstanding that 7 million of acquired EBITDA. So yeah, maybe if you just talk to potential acquisitions going forward, is that actually a focus and what, Yeah, it's a pretty big shift to when you made that acquisition. I think you raised money at $1.45, thankfully at a very small premium, and we're now below $1, so maybe just what went wrong there and future acquisitions, how would you finance those? You've also spoken to wanting to repay debt, so that seems a bit contrary, but appreciate your thoughts on that.

Yeah, so a fair bit in that question. The absolute priority for this business right now is to generate profit out of the existing business that we've got organically and to accelerate the new store program in the Connect business. So that's where our focus is. Second to that, we want to strengthen the balance sheet. So our priority is to get those debt levels down. So, you know, really acquisitions at the moment are not a priority. For the business, from a Steelmasters perspective, that business has performed largely to expectations. So I think that has been a good acquisition for the group which will give us returns over the medium to long term. The first half result is lower than what our normal expectations would be. but hampered by the D365 implementation. A couple of points to make there. The first is those 73 branches, when you go live to facilitate that, they get shut down for two days. Now, some sales you can bring forward and some you can defer, but there was definitely a sales impact through that go-live period. And then just the distraction of the implementation period in particular has distracted the business away. So I don't think the first half is a normal running rate, if you like, for where this business sits from a profitability perspective. So hopefully that answered the question, Charlie.

Yes, thank you. And then just finally, I think there was an article six or seven months ago speaking to your larger shareholder, potentially pushing to sell off the fluids business or something of a more structural nature to create shareholder value, because I suppose the stock hasn't really done anything over the past seven to eight years. It's basically flat, notwithstanding. Obviously, COVID's been very disruptive and lots of acquisitions along the way, but yeah, could you just, is there any merit or consideration being given to splitting up the various divisions or is there synergies to retain the current with fluids and trade, et cetera, please?

Look, I think the first thing I'll say there is we believe now that we're past ERP, accelerating profitable growth will take care of the share price, hopefully sooner rather than later, and we'll see a benefit there. As far as the structure of the group, of course, the board's always considering that. At the moment, we're 100% committed to growing what we've got and to focusing on getting this business back to year-on-year sales growth and accelerating profitable growth.

Great. Thank you.

Thank you. Once again, if you would like to ask a question, please press Star 1 on your telephone and wait for your name to be announced. Your next question comes from Liam Cummins from Petra. Please go ahead.

Hi, guys. Congratulations on getting to the ERP. I think you're probably one of the few corporates, I think, in history that have actually achieved an on-time, on-budget results or what on there. But I think Charlie basically asked most of the things I wanted to cover up on. maybe thinking onto the organic growth sort of things, particularly with reference to new stores, just given your commentary around the varying dynamics on a state-by-state and divisional basis, how you're sort of thinking about new store rollouts in the next sort of six to 12 months and where they may be focused?

Yeah, look, we are building up a map of the preferred locations we would like. The two constraints that you have when trying to set up a new store is one, finding the right property and two, making sure you've got the right branch manager who will generally bring in the right team for you. So we're building up across our network future branch managers. We just kicked off a leadership program yesterday that I attended which will help accelerate that side of it. But the properties is probably the tricky one, just trying to find them in the locations we want because we won't compromise on the location or the size of the property because we want to get it right from day one. So in a little bit we're going to be opportunistic as to where we open stores up. We've got a number on the go at the moment. bringing in the property search firm is making it a bit easier because they know that property before they come onto the market. So that'll help us. But Metro Sydney, Metro Melbourne are obvious geographies where we're underrepresented that we're keen to get more stores in. But yeah, we've got a long list of options.

Great, thanks. And then you mentioned you're winning a little bit of share organically through sort of competitive attrition. Can you maybe speak to some of the drivers and where you're seeing where those competitors are going wrong, whether it be sort of store location or conditions around store management and how much upside there is for you to capture as they roll through and whether there are any opportunities to look at store locations and staff, etc.? ?

Yeah, so this comes back to the larger fundamentals of the markets that we're in, where we've got this huge network of smaller family-owned businesses, largely with ageing owners and very little in the way of succession plans. So one of these businesses that has closed had got to the point where they weren't making any money. So that was their reason for closing. The other was still making money but not enough profit for somebody to be interested to acquire it. So we think this is going to happen more often than not. Obviously the ideal way for us to grow rather than doing it through acquisition because we don't have to pay anything. We can cherry pick the customers we want. We can cherry pick the people that we want. We did have a look at one of these locations, potentially taking the building as well, but that wasn't practical. So we'll look at all those options when these things happen. It could well be an easy entry to a new store, but it will always be a growth opportunity for us when they come up. But we think this will happen more often as time goes by. Thanks.

Thank you. Your next question comes from Simon Conn from IML. Please go ahead.

Hi, Robert. Can you hear me? I can hear you, Simon. Yeah, all right. Thanks for the presentation. Just a couple of questions for me. I think, first of all, in the presentation, you mentioned 120 store aspiration in Australia and 25 in New Zealand. Can you just put some details around that? Am I correct in saying that? Presentation was 100-plus in Australia and 25-plus in New Zealand. We already have 22 in New Zealand, to give context. On our current run rate, we'll have 53 in Australia by the end of FY25. Right. And what's the average sales per store? I would say average, you know, let's call it $2 million to $1.5 million. Right.

And secondly, the implementation costs on the AP have identified a significant item of 5.1. Does that cost then disappear completely into the second half and going forward?

Is that all one-off? That's all one-off. There'll be a little bit of run-over into the second half, but it's not going to be material. We're just working through that today with the IT team. The majority of the cost has absolutely gone now. The consultants that we had have dropped out. The big spend we had with our partner, Fusion 5, has gone. And over the next sort of two or three weeks, the final resources drop out. So, yeah, we're just using the tidy up a couple of things at the moment. We've got a couple of defects. So largely the 5 million can be added back for the second half. And then you mentioned also that this implementation resulted in a two-day loss of sales for the stores. So could you articulate... I mean, you must have your generous numbers. We've talked about that. Can you talk about how much sales you lost in the half because of the impact? Yeah, look, we estimate probably around somewhere between $1.6 and $1.8 million worth of sales during that period when you compare to what the normal running rate would have been over those couple of days for each store.

Right. So there's sort of six million new bats in the first half from the ERP. Yeah.

Yeah. Yeah. Okay. Thanks. And just one last question. Sorry, I think I asked the last time. The fluids business, if you were to split that off and sell it, what would be the part of the corporate cost that would have to go with it? How would you allocate the overhead left to fasteners? Yeah. Look, if you were going to... do something with that. I'd be guessing, Simon, but it wouldn't, you wouldn't get out, you know, if sales for fluids are 35% of group, you wouldn't get 35% of corporate costs out. And that's one of the things we've built, you know, IT system and things like that for a much larger business. So you chop it out, you're going to not get the same percentage, if you like. Yes. So it is for Australian costs. Okay. Thanks, Robert. No worries. Thanks, Alan.

Thank you. Your next question comes from Shu Yang from MicroEqualities. Please go ahead.

Good afternoon. I just want to ask about the net working capital. So after the ERP implementation, I imagine you should see some benefits to net working capital. It's still sitting above $80 million at the moment and probably over 20% of your annual revenues. If you can give a pie to where you think that should land in the near to medium term.

Yes, that's a difficult question to answer right now. The big number in our working capital is the inventory. Let's call it $80 million. So that's where the real opportunity here is. We've got good results ongoing, managing debtors, creditors at the moment. We're being relatively gentle on but the credit of the number is what it is. So inventory is where we can get the gain. What we've got to do is get the system to learn and balance up where we want to sit relatively between stock availability and inventory levels because they're tied together. What we're seeing at the moment is the availability levels already coming up with the system not even fine-tuned. So that's only going to improve. But look, there is definitely a prize in inventory for us. It'll take a bit of time to deliver that, but we'll be looking at that very, very closely. And we're just also looking at bringing in another potential consultant who's got a lot of expertise in this area just to help us accelerate that as well. So I'm sorry, I can't give you a number, but there's definitely a reduction opportunity there.

Okay. Do you think that there will be a reduction opportunity or is it more you're growing to that number as you expand your site footprint?

That will depend a bit on how quickly we grow, but if you just look at it as we sit here right now, we would expect to operate on a lower inventory number once we've got the system fine-checked.

Okay, great.

Thank you.

Thank you. As there are no further questions at this time, I'll now hand back to Mr Bullis for any closing remarks.

Great. Thanks, Darcy. All right. The final words are very similar to previous years, a little variation. But look, the key now is we've got the distraction of the ERP upgrade behind us. The investment we've made in all areas of the business has it set for success. We're operating markets that we expect to improve through 2025. We've got the right strategy, the right people, and we're implementing very clear plans for accelerating profitable growth and increasing shareholder returns. I look forward to providing updates throughout the year. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.