IVE Group (ASX:IGL) FY22 H1 Results Presentation, February 2022

Company Presentations

IVE Group Limited (ASX:IGL) Executive Chairman Geoff Selig, CEO Matt Aitken, CFO Darren Dunkley and Head of Relations Richard Nelson present on the group's FY22 H1 results.

Geoff Selig: Thank you and good morning, everybody. And welcome to our FY22 H1 results presentation. In terms of the contents of the presentation this morning, we've got clearly our first half results, some important business updates in addition to what we provided at the AGM back in November. We'd like to spend… Given the last two years has been COVID-impacted and there's been a lot of talk around the impacts of COVID on the business, the company has continued to perform very well under the circumstances. So, we felt it important and timely for existing and potential shareholders to recap on our track record since listing just on six years ago. We'll then move on to the outlook and guidance and then Q&A at the end, as we just foreshadowed.

Turning to the dashboard… Just to point out before we go through the dashboard that the numbers, our underlying results on a continuing operations basis and any comparisons to PCP, exclude JobKeeper receipts that were received in H1 FY21.

As the heading says, a significant uplift in EPS over the prior corresponding period as a result of solid revenue growth, which we'll touch on later, stable margins and the leverage of a recalibrated cost base over the last couple of years. 12.2 per cent increase in revenue. 24.7 per cent increase in EBITDA. 99 per cent increase in NPAT. Gross profit margin once again remaining stable, slightly up. Operating cash conversion to EBITDA of 78 per cent. Net debt, which we'll touch on later, at $78.7 million with still $51.6 million cash on hand and earnings per share up 104 per cent on PCP at 14.6 cents. As a result of the financial performance for the first half, we declared today an interim dividend of 8.5 cents per share fully franked. I'll now hand over to our CEO, Matt Aitken, to walk us through the financials.

Matt Aitken: Good morning, everyone. And thank you, Geoff. I'm going to cover the next two pages, pages five and six in the investor presentation. Revenue of $382.6 million is almost $42 million up on PCP of $340.8 million. And that includes Active Display Group and AFI Branding acquisition revenues of $8.2 million. Revenue has increased over PCP across all parts of the business, with our top 20 clients increasing 12 per cent over PCP. We have seen clients moving back onshore from Asia due to supply chain challenges, and this has been most evident in the retail display part of our business. And whilst a number of retailers reduced their catalogue volumes due to a lack of predictability in their own product supply chain, we also saw a large number of retailers, like Kmart and Target, returning to the catalogue and letterbox channel. Client retention remains high, with no material client loss, whilst the travel, tourism, event and exhibition sectors remained at similar levels to PCP. We are now seeing signs of those rebounding as we would expect.

Pleasingly, the majority of the revenue uplift related to our continued focus on cross-selling and market share growth. And by way of a few examples, during H1 we extended our scope of services through securing Westpac's premiums and merchandising contract, and expanded our contracts with Big W, Woolworths, Metcash and Priceline, all in the area of retail display. In the letterbox and distribution part of our business, revenue was up 17 per cent over PCP as a result of significant new business wins during May to July last year. Principally, these were Officeworks, Bunnings and Audi. And to lesser extent, the closure of a competitor distribution network in Australia in early H1. As mentioned, new business momentum across all parts of the group has been strong through H1. And, as we enter H2, I'm pleased to announce we are in the final stages of contract execution for two new contracts, each with annual revenues of circa $10 million per annum.

Turning to page six, gross profit margin of 47.5 per cent was stable to PCP of 47.3 per cent, which reflects the strong revenue growth over PCP, stable market conditions, notwithstanding the current supply chain challenges and tight management of our cogs. NPAT, as Geoff said, of $20.9 million was a 99 per cent increase over PCP of $10.5 million. EPS at 14.6 cents per share was a 104 per cent improvement over PCP of 7.2 cents per year. And EPS growth was driven by the uplift in revenue, stable margins, lower finance costs, and the benefits of a cost-based recalibration that occurred 12 to 18 months ago. Appreciation and amortization of 21.4 million to PCP of 24.2 million, net finance costs of 3.7 million were lower to PCP of five million. And we had 3.4 million of non-operating items excluded from the underlying earnings, largely related to business restructure and relocation. The employee share issue to all employees, as we mentioned at the release of our full year results in August last year, and software as a service costs relating to IT platforms not yet deployed.

I'll now ask Darren to skip through pages seven and eight of the presentation.

Darren Dunkley: Thank you, Matt. And good morning, everybody. I will now continue to take you through the financial section of the presentation, starting at page seven, with the net debt.

Continued balance sheet strength as a result of our strong cash generation, maintaining low gearing levels, enhancing our flexibility and capacity to pursue a range of earnings-accretive initiatives. Net debt of 78.7 million is flat on 30 June 21, and compares to 90.1 million on PCP. A good result given seasonal work and capital increase as well as cash funding of the acquisitions of ADG and AFI. Our cash in hand of 51.6 million is after the group repaid 50 million of senior facility in the period, cancelling 35 million of the facility with the remaining 15 million of the facility undrawn. The group's $30 million working capital facility also remains undrawn. In total, the group has 45 million of undrawn facilities available.

The pay down of senior debt will continue to reflect in reduced finance costs in our NPAT earnings. Again, our balance sheet strength cornerstones our capacity to execute on growth initiatives through the remainder of FY22 and beyond. Capital expenditure. Our operational asset base is in excellent condition and continues to result in lower capital expenditure than previous years on the back of investments in meaningful acquisitions in growth initiatives. First half capital expenditure of 3.5 million, excluding our investment in Lasoo. Full-year capital expenditure forecast to be circa $13 million. Again, excluding our investment in Lasoo, which is made up as 10 million in group-wide target investment and maintenance, as previously communicated at the FY21 full year results release. Three million in growth acquisition. Capital expenditure to support the integration of ADG and AFI into our retail display operations in Victoria. This is a good example of us using our balance sheet strength for growth initiatives. To reiterate on previous updates, our ongoing capex spend relative to our depreciation expense for base business is expected to be approximately 60 per cent of our depreciation pre AASB 16.

On page eight, cash generation and interim dividend, operating cashflow conversion of 78 per cent. Operating cashflow conversion impacted by the seasonal increasing working capital due to higher activity levels in the period, as was foreshadowed at our FY21 full year results release. Disciplined management of the business, working capital and debt underpins continued strong dividend payment for the period, resulting in a dividend of 8.5 cents per share fully franked being declared. This concludes the financial section of the presentation. I'll now hand you back over to Matt. Thank you.

Matt Aitken: Thanks Darren. As we mentioned at the release of our FY21 full year results in August last year, we've earmarked $30 to $40 million for investment in growth initiatives, including acquisitions. The acquisition of Active Display Group and AFI Branding Solutions in November last year was the first use of these funds as part of executing on our strategy and pursuing a range of growth initiatives we have on our radar. The integration of both ADG and AFI continue to progress very well, and is anticipated to complete by the end of June this year, at which point all four ADG operations in Victoria will have been fully integrated into our facilities at Bayside Victoria. Post integration, we remain confident in achieving $45 million of annualised revenue, 6.5 million dollars of EBITDA and NPAT of $4 million. And all the key customers and staff have successfully transitioned to IVE, with our sales teams already cross-selling IVE's broader offer to ADG and AFI clients, and likewise to IVE clients for new products and services that we have acquired.

On page 11, in relation to supply chain, the global supply chain disruption for both raw materials and finished goods is requiring ongoing, close management by the IVE team. Not withstanding we remain well placed to navigate the current dynamics, which we expect to continue for the foreseeable future. As I mentioned earlier, we've been the beneficiary of clients moving revenue back onshore. And this has been particularly noticeable in the retail display space. The global supply chain challenges are primarily affecting the supply of paper, where we maintain strong relationships with our global and domestic partners. We still intend to keep a focus on building our inventory levels, as we previously foreshadowed in 2021. Longer-term impacts of any upward price movements have been factored into contract terms and renewals. And we continue to work closely with our clients to manage and mitigate wherever possible any short-term impacts.

Turning to page 12 and Lasoo. Over the last 12 months, we have committed to investing in the enhancement and amplification of Lasoo, which is Australia's leading digital catalogue and retailer platform, with a very loyal and stable consumer following. We intend to continue that investment over the next two years, as we improve the consumer experience and work closely with our retail clients to unlock opportunities to drive further revenue for their business. Phase one investment of 3.5 million dollars to replatform, refresh the brand, and update user experience, both at an app and browser level, are progressing according to plan. The new platform is now in the final stages of development and on track for relaunch in the coming six months, at which point we look forward to sharing more detail with you. I'll now ask Geoff to step you through the next section of the investor presentation commencing on page 13.

Geoff Selig: Thanks Matt. Look, as I said up front, before we walk through the outlook and the guidance, we wanted to spend some time reflecting or recapping on our track record of strategy execution and capital management since we listed just over six years ago. We thought that was timely and important given the disruption of the last two years and the focus on COVID, through which the company has continued to perform strongly, as I mentioned earlier. From our perspective, a clearly defined and well-executed strategy has cemented IVE as the largest integrated marketing communications business in Australia over the last six years. And, as a result, we hold leading market positions across all sectors in which we operate. From an investment and an expansion perspective, we have invested to expand and diversify our offer, and that has resulted in the compelling value proposition we take to market. Our strong free cash flows, access to capital -- we've done two capital raising since we've listed -- all of this has enabled the company to execute what can only be described as such transformational investment program that has really essentially doubled the size of our business since we listed.

Our market-leading positions across the marketing communication sector -- as a result, we have a stable and diverse client base. They are a tier one client base. A revenue mix across a range of sectors, which we published before. And very stable margins over many years, very reliable cash flows and a strong balance sheet, which we've touched on previously and will again shortly.

If you look at the top of page 14 and the operating and free cash flow diagram, this is a simple but powerful way for us to demonstrate the cash generation of the IVE business. Essentially, from FY17 to FY21, we have delivered free cash flow of $279 million. An average of 105 per cent operating cash conversion to pre AASB 16 EBITDA. And that is in the context of the period, FY17 to 19, of significant capex to support revenue and expansion initiatives. As you know, capex is now returned to more normal operating levels.

Ultimately, the outcome of strong cash generation is dividends and, to restate the company's dividends policy, it is 65-75 per cent of NPAT, and that's what we target for the full-year payout ratio. Since we've listed, we've paid 104.3 million dollars in fully franked dividends, including the interim dividend we've declared today. And that average is at a 7.6 per cent yield, excluding the franking credit benefit, and this is in the top quartile of all ASX-listed companies. That also excludes FY20, where to be prudent, no dividend was paid as a result of the COVID-19 pandemic. We also successfully completed the share buyback last year, which was good timing and a good outcome, having spent $7.4 million to buy 3.6 per cent of the issued capital of the company back at what was an average price at the time of a $1.37, relative to the close yesterday at a $1.92. So we feel at this stage, we have no plans to initiate a further buyback, and feel it's more important for us to focus on our strategic priorities, to pursue further earnings-accretive growth opportunities as outlined previously and once again, before we move on to the outlook.

So, in terms of growth opportunities, the first point would be more of what we've done previously, and that is to grow our revenues organically, through investment and cross-sell and growing market position and leveraging off our integrated offer, our world-class operations, our market position and our competitive advantage. The strength of our balance sheet, as Darren touched on before, places us in a very good position post COVID to invest across a range of strategic organic initiatives together with opportunities that may present in terms of attractive acquisitions.

At all times, we will make a strong balance sheet. You'll see from our numbers that, based on our FY22 full-year earnings guidance, we expect net debt at 30 June to be circa one times pre AASB 16 EBITDA. That is well below our stated leverage target of 1.5 times pre AASB 16 EBITDA. And as we've said a number of times, before we have allocated $30 to 40 million to invest in a range of these types of opportunities. Certainly, Matt's reference to ADG and AFI before is a good example of that. We intend to drive to grow our fibre-based packaging offer, and this would be certainly expedited if we can find an appropriate acquisition in this space.

We'd also expect a number of bolt-on acquisition opportunities will present over the coming 24 months. The company has a demonstrable track record over many years of successfully acquiring and integrating businesses to further strengthen our own business and to also unlock synergies from an earnings perspective. And then, finally, an important growth opportunity for us that Matt spoke to previously and will say more about over the coming three to six months is our investment in the amplification and enhancement of the Lasoo platform.

So, I will now hand back to Matt to walk us through the last part of the formal presentation, which is the outlook and guidance on page 17.

Matt Aitken: Thanks, Geoff. So, turning our attention to the outlook statement on page 17, as Geoff said, a solid H1 result and continued momentum across the business places us in a strong position to deliver a healthy full-year result that will be well up on FY21. As illustrated by the strength of our H1 earnings, heightened operating leverage across the business units has contributed to a significant uplift over our H1 FY21 performance, as existing client revenue rebounds, and recently secured new business phases in. Revenue momentum is strong and we remain optimistic this will continue over the remainder of FY22. And from an FY22 full-year earnings guidance perspective, we expect to deliver underlying EBITDA of between $98 and $101 million. Underlying NPAT is expected to be $33 to $35 million, which is a 67-77 per cent increase over PCP. And H2 NPAT will be impacted by $3 million as a result of one-off contractual timing differences of recent paper price increases. And we'll continue to monitor closely and manage our paper supply chain pressures, which we expect to continue right through the remainder of 2022. Restructure and acquisition costs are expected to the approximately $4 million, and capital expenditure is expected to be $13 million, as Darren outlined earlier, excluding the Lasoo investment of $3.5 million dollars, with net debt at 30 June 2022 expected to be circa $85 million. The business still has a range of initiatives that it is executing on.

These are to complete the Victorian business relocations and Bay Side Victoria site consolidation. That will occur by 30th June 2022. To successfully complete the integration of ADG and AFI into the broader IVE business -- again, to complete by the end of June. The final stage development go to market launch of phase one of the enhanced Lasoo platform that I spoke to earlier, again, timing for the end of the current financial year, towards the end of June. And to finalise our strategy and plan to build a fibre-packaging capability within the broader IVE group. Before handing back to Geoff, I'd just like to acknowledge the contribution of all of our staff during H1, the leadership shown by our senior leadership team and the ongoing support of the board. Thank you very much and back to you, Geoff.

Geoff Selig: Thanks, Matt. That ends the formal part of the presentation as uploaded this morning. So now we're happy to move to Q and A.

Richard Nelson: At this stage, we do have a question. It regards inflation, where it seems being rising and threatening to become entrenched. Is this changing the way you think about your debt and leverage going forward?

Geoff Selig: Yes. Well, I wouldn't necessarily link a reference to inflation to our view necessarily on gearing or net debt. I think the important thing for us as a board and as a team is to, as I just said before, would be to ensure that we maintain the strong balance sheet that we have, and that we look to deploy the capital we have put aside wisely. And if you look at the ADG and the AFI acquisitions for $6.5 million, total acquisition price, including the deferred component to deliver a $6.5 million EBITDA number and $4 million NPAT number, that's a really good example of us using our money wisely and acquiring a business in this instance, rather than an organic investment, on a very low multiple. So, I think we keep a close eye on inflation and managing costs as we always do in our business, and the board and the team are acutely aware of the importance of us maintaining the strong balance sheet, because that benefits the business and key stakeholders of the business in many, many ways.

Richard Nelson: Thanks, Geoff. Okay. We have a question from one of the analysts. Hamish, if you wouldn't mind unmuting, and you can ask your question.

Hamish Murray: Apologies, guys. I don't think I could use the interface for some reason. Might be easier… Yeah, typing. No, I was just going to ask couple, the first being the travel and tourism and events, merchandise for events, you mentioned that really hadn't moved in the half, but has only started to respond now. I recall it was about 2 per cent of FY21 revenue. Is that about where it is and where can that go if it returns to pre COVID levels? Do you just have an idea of that or a range as a percent of revenue?

Matt Aitken: Hamish, it's Matt. So, we've definitely seen good momentum coming back into it at the moment. I think one of the things outside of travel and tourism in that exhibition and event space is the acquisition of ADG and AFI gives us significant additional capability in events. That could account for quite a significant uplift in the AFI part of that business. They have historically been very, very strong in that space, and we're seeing really strong interest coming back there. But no, we would expect the travel and tourism spend to continue to rebound strongly and back to historic levels, if not greater, for a near period of time, as that part of the sector and industry ramps back up.

Hamish Murray: And is there any broad revenue range where that was pre COVID? Obviously, it'll be larger given the acquisition, but just that underlying, I guess, core ideal.

Geoff Selig: Yeah, look, I think in the last spread we put dollars across sectors travel and tourism was travel and tourism was about 3 per cent of $680 million. So, we're talking roughly 20 mil in total revenue for travel and tourism. So, I think it's a fair expectation that that would all come back. And look, it may even ramp up as the borders are open again, but we're not talking tens of millions of dollars, but still it would be a nice uplift that's not been there in our first-half results.

Hamish Murray: Thanks Geoff and Matt. And just, I've got two more. Just one about those two high-profile clients that you've won. Great work on that. It looks like it's 20 mil or thereabouts in annual revenue. Can you disclose a timing of that and how much of that is baked into this really strong guidance you guys have or how much would flow through, I guess, to the next year and FY23?

Matt Aitken: The majority of it is. So, one of them has commenced transacting already, Hamish, and one won't commence until quite late in the current financial year. The one that has commenced trading already isn't really in the current financial year going to make a huge difference to the uplift in outlook statement or result. So, it's really probably addressing, you know, new business budgets and targets that we already had. So, the majority of the benefit will come more in FY23 than FY22.

Hamish Murray: Thanks. And just one from me. You guys have flagged this excess capital you have on your balance sheet and willingness to do acquisitions. Are you still looking in the 3PL space or are there different areas that... Given, I guess the impacts that may have happened to competitors, and you guys do have a nose for some pretty attractive acquisitions lately, just can you give us any colour around what's around and how you think about it?

Matt Aitken: Certainly from a 3PL perspective and I'll let maybe Geoff talk to sort of what else might be around, Hamish, but from a 3PL perspective, part of acquiring the Active Display Group business had quite a substantial 3PL capability inside it as well. It was a business that was previously known as Market Force that WPP owned as well, and they folded that into the ADG brand. So, part of our integration, if you like, is the relocation and the integration of the best part of 10,000 pellets' worth of 3PL customer stock into our existing logistics facilities. So, that is seeing good growth in that space already. So, it's really the ADG, AFI acquisitions are multi-pronged in terms of the parts of our business and the parts of our strategy that they're serving to.

Geoff Selig: I think, in addition to that, the board's just signed off on an additional shed in Western Sydney, both to support the growth of our existing logistics business, which has been very strong over the last couple of years, and also with a view to pushing hard to grow the 3PL revenues as well.

Richard Nelson: Thanks. And in continuing that theme, the next question is, do you expect further investment in inventory for the second half, given the ongoing supply chain issues? And also, do you expect any further supply chain impact due to what's going on in Europe?

Matt Aitken: So, I think the answer to the question is yes, we do expect to continue to grow our inventory levels. The average order time and delivery time out of Europe now for raw materials, specifically paper, is circa seven to eight months. So, if it's not already on the water, then it's not going to impact our H2 inventory levels. However, we procure raw materials of paper quite specifically across all parts of the globe, including domestically here out of Australia, out of Asia, and out of North America, so we're not completely reliant on Europe by any means. But we do intend across the core operating parts of our business and that print space to grow inventory levels.

Richard Nelson: And just a clarification question, is the impact from paper prices, is that in the guidance?

Geoff Selig: Yes, it is.

Matt Aitken: Yes, it is. So, there're $3 million of NPAT that we have called out in the outlook statement has already been taken into account in the guidance number.

Richard Nelson: And just on that theme, how do you see your ability to pass on rising prices?

Matt Aitken: All of our contracts have clauses in them that enable us to pass increases on. Some of those may have timing differences in them, as we're currently seeing, and it's one of the reasons we're calling out a $3 million NPAT impact for H2. But all of our contracts have the ability for us to pass on paper increases, be that immediately or at periodic stages through that contractual period.

Richard Nelson: Okay. Shifting issues just a little bit, what are the major competitive threats to each of your main businesses? And perhaps bringing in another question, which just talks about how do you see the company changing more broadly in the medium term?

Geoff Selig: Yeah, well, I think as we said previously, we don't have one headline competitor because of the diversity of our offer. We deal with competitors at different levels, albeit we have far less competitors now than what we had five years ago and 10 years ago, that's the first point to make. We also hold very, very strong market positions in the respective parts of the sectors, the sub-sectors in which we operate. And that puts us in a really unique position from which to compete. If you look at the fundamentals of the business, our people, our asset-based operational footprint, our buying power, our level of efficiency -- on all of those fundamentals, it puts us in a very, very strong, a competitive position right across the various businesses that we have as we look to compete and grow market share as we emerge from COVID.

Richard Nelson: Okay. The next question is, are you seeing problems with retaining and/or acquiring staff?

Matt Aitken: I wouldn't know necessarily... It's Matt here, I wouldn't necessarily say we're seeing problems, but it's definitely a more challenging environment to attract staff because clearly there's a lot of opportunity out there at the moment for employees. So, we would expect to see that change as the borders open up and then we have more migration into Australia, but we're definitely seeing some challenges in certain roles, particularly in our tech roles. We've seen high demand for tech roles in Australia over the last six months.

Richard Nelson: And one other on the acquired businesses, can you comment on the current run rate of those businesses into the second half of the year?

Matt Aitken: I think the revenue for H2 for the acquired businesses was circa $13 million from memory, Darren?

Darren: Yep.

Matt Aitken: So, it's minimal, but as we move through H2, they will get up onto that $45 million per annum run rate by the time we hit the start of July, particularly as we see the events and exhibitions sector continue to come back and improve the opportunities for the AFI branding part of the business.

Richard Nelson: The question was relating to how does the company see changing over the next five years in particular with reference to the evolving digital environment?

Geoff Selig: Yeah. Look, it's a question that... It's Geoff here. It's a question that we've dealt with previously and that we've talked about previously. For us, our business is not about one channel, our business s is about an integrated offering and communicating customers, or clients communicating with their customers, across multiple channels. And that means traditional channels like print and the range of digital channels. And we play quite heavily in both spaces, the digital and the more traditional or the physical, the more tactile, or whatever you wish to call it. And ultimately that's the power of the offer that we take to market, and that is ultimately the way most of our clients communicate. And if you look at a lot of the larger retailers, for example, they have a strong digital footprint, but they're also in 7.5 million letterboxes every week. They work hand in hand. And there's a lot of other examples we could point to in customers across the group that would fall into exactly the same category. So, it is a combination, and through making the right decisions many years ago and continuing to evolve and invest, we're in a strong position to be across multiple channels, which ultimately is the answer to that question.

Matt Aitken: Yeah, it's Matt here. I would just add to what Geoff's said that I think we've read the trends and we've read the movements well in the industry and across our business, and our data-driven communications business is one of those really good examples where we are one of the largest Salesforce partners in Australia. We're a very large Adobe marketing technology partner as well. We are navigating all big four banks through their customer comms strategies in terms of how they work directly and integrate and community directly with their customers, no matter that channel. And the professional services component of our data-driven communications business, now the revenue there is up to $25 to $30 million per annum in professional services and consulting revenue. So, I think it illustrates that, right across different parts of our business, we are embracing those digital channels and we're right at the forefront of where our clients want us to be in terms of being a relevant marketing partner in their supply chain.

Richard Nelson: Okay. One last check and there are no more questions now. Thanks, Matt.

Matt Aitken: Thank you all.

Geoff Selig: Thank you.

Darren Dunkley: Thank you, everyone.


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