Stealth Global Holdings Ltd

ASX:SGI

Earnings Call Transcript 2022-Q4

[Michael Arnold, executive]

Hello, and welcome. I'm Mike Arnold, Managing Director of Stealth Global Holdings. We're here today to obviously cover the FY '22 results, but also provide you with an update of our strategy and also our 2023 outlook and plans.

So I can just take you through the beginning of our organization, which is where we're at today. So our business obviously involved quite a bit in the last 4 years since our listing. Today, our key theme is about bringing everyday industrial supplies and solutions to everybody within a workplace. We've been able to do that more so over the last 12 months with the acquisitions that have been undertaken. So it's been quite an exciting period and also a very busy period in what you would see a pretty challenging economic time.

So today, our business turns over more than $100 million. we provide a wide range offering of products and also services and solutions that are tailored for business, trade retail and also independent retailers. We've now been listed for 4 years. We focus in 4 key product segments, from industrial and tooling, safety, workplace, truck and automotive. One of the things we've been able to advance, not only organically but through acquisition, is our industrial services offering and also our supply solutions, which we're finding is getting quite a bit of uptake and has been well supported by our investment in technology, but also investment in our scale over the course of recent times.

If you look at our operating model in its most simplistic form. As I said, there's 3 key areas of our product offering, which is a wide range products model and also our customer solutions model. Our operating segments are now driven in 3 key areas. So business enterprise focus on business customers, consumer to trade and retail. And also from a member point of view, which is independent operators and retailers that are operating under the United Tools brand or under the Industrial Supply Group brand.

Our target customers are all customers of all types across all industries and industrial consumers that are obviously in every or individual consumers, sorry, for every workplace. Our value proposition is wide range, all brands, in stock, competitive prices. We've got a quality portfolio and great customer experience. That's really what we've add on in the recent times.

And our channel is now an omnichannel environment, where we have a sales force, we're in-store, we're on-site. We have an online capability across multiple web shops and also have solutions offering. And that is underpinned by key competitive advantages.

So our product range now to give you a bit of an idea of what that looks like, not only the underlying subcategories that sit there, but also the key brands that sit behind obviously, our business. And they're just a very simple sample. You can see when we're talking about 400,000 odd products in stock that's well supported by those key leading brands. They are an everyday commodity in what we offer end-customers.

But today, we're in 74 different locations. You can see on the right-hand side, almost pinpointing where we are. 250-odd people that we employ directly, indirectly through our independent members, it's about another 350 odd people in there. Almost 40% of our workforce is female, which we're really proud. That's increased considerably in what you would typically call an industrial type of business.

We hold 400,000-odd product lines in stock. And they are our main movers. We also then pull and have access to another 600,000 products from a large range of suppliers, and we pull that on demand based on the customer order. We now have 8,000-odd business customers or accounts that we deal with. And over the last 2 years, we have accounts and also cash returns of about 34,000. So that's really improved and given us quite a comprehensive size of resources and locations for our business.

If you look at our distribution strategy today and our value proposition, we have a direct distribution model, which is through our sales force or contact centers, our branches, online and also our on-site stores, so they are 100% company-owned. We then provide a comprehensive network through independent members. So they are retailers, as I mentioned earlier, all independent operators that have their own stores. They have trade stores. They do offer it online. They operate for us as fulfillment centers, but they also have sales teams.

So what that's done is take the comprehensive like capital business, but being able to give us a pretty large network. Our Board structure, which is really and also our management structure do show individuals that are obviously leading the business today. Chris Wharton has been working now as Chair for 5 years, as is Giovanni Groppoli. And Simon Poidevin has joined us in the last 12 months, and he replaced Alan Cransberg. And Simon's background with Bell Potter as the Managing Director of Corporate, as well as a number of other financial institutions in Sydney, has been really valuable for our business through his connections, But also one of the other things that Simon is well known for is the captain or former captain of Wallabies Rugby World Team -- Rugby Union Team sorry -- playing 59-odd tests. We're really good management structure that undersits that with key individuals that drive our business that we've done.

So I just want to give you, before we go into FY '22, a bit of a strategic insight, take you back through the journey of the last 3 years. But also, I guess, the framework that is behind our business today. And that's been really consistent in the last 4 years and will remain consistent at least through our 2025 strategy, but I see that rolling on further from then.

So we have a 7-pillar framework, and that sits from organic and M&A growth, which you have clearly seen if you've been an investor in our business for that time, trying to get a balance across the segments as well as geographies has been really important. So we now operate in the $40 billion addressable market, and the largest player in that market is about 4.5 odd percent. Having a decentralization -- a decentralized organization allows us to be closer to the customer. So if you look at the hybrid distribution model that allows us to be [indiscernible].

Equally, we bring a vertical integration element, which provides us one large platform that the decentralized organizations can tap into. So comprehensive range, and that's where the synergies we can create and explore, we look for distribution excellence. And clearly, what underpins all of that is a strong sustainable business. So our focus on long-term value really comes about in this blueprint.

In 4 years, and I just want to take a number of parties that are online today through our journey. So our strategy has been consistent in 4 years. We said that we build a company for the future and a capital-light model, combining the assets of the company and the independent as well as partners. That's allowed us to grow considerably, which I'll show you in the next couple of slides. Our focus is being to build scale, build high revenue, give us the buying power and our strong competitive position. We've been able to deliver that. And again, that's been consistent.

So whilst we've achieved high growth, we've invested every dollar of net profit. That hasn't translated to the bottom line because we've been reinvesting in the strategy. We've gone from $20 million in turnover to $100 million in turnover in 4 years, of which out of that, we walked away from our Africa operations is another $20 million. So we've actually dropped $20 million and still replaced all of that.

The acquisitions that are being undertaken have been very attractive. And I'm sure if you look back at those price tags, we've actually got a very good deal. But those businesses need to be invested in, and we expect those to deliver benefits in the manner that we forecast. So it's important that we're building long-term shareholder value from acquiring those businesses attractively in the beginning, investing in them over a period. And then that allows us to meet our long-term target, which we've always been consistent with, 5% EBITDA. And we have a long-term target of 5% net profit before tax.

So I think the ability to achieve that is still pretty embryonic in terms of the size of the acquisitions that we've made or the timing of those in the last 18 months. So there's a lot of upside in the future. So the purpose of giving you a bit of an idea of where our journey was because today, the company that we've built and the company that we continue to build has really ticked the boxes in a number of key areas.

So we had delivered a large-scale business today. We do have a differentiated service offering. We've got omnichannel capability, 95% if what we sell is nondiscretionary products. So we don't have the cyclic demand that sits behind that. Our vast assortment is unique in its own right and through 1 particular company we're almost differentiated from anybody else in the market. That is a clear point of difference.

We're now one of the largest distribution groups in Australia with a great balance and diversity in our portfolio and will continue under a capital-light expansion model, and that means more stores, bigger network.

We have a really good Board, a really good management team that sits behind us and great culture across all our different entities. Our balance sheet does provide us with flexibility. But clearly, operating leverage leads to stronger cash flow. So our focus over the next 3 years is to bring it out and deploy or create those synergies which strengthens our balance sheet. So it's been substantial. Our ambition absolutely is to be the market leader. And I think we've got some fantastic foundations that have been set, we've sort of that together.

And if I can just finish on this before I take you through FY '22. This is what we've created. So we've gone from $20-odd million to $100 million, from 1 store to 74, from 2,000 products to 400,000, from 200 customers to 8,000 customers and 34,000 consumers. Employees from 40 to 250, and suppliers from 300 to 2,500.

Now I wouldn't say there's too many businesses that sit out there that have achieved that particularly in our space in such a short period of time. So we remain committed through the scale that we have, the range that we're offering, our revenue and clearly using the leverage to increase our profitability and also strengthen our balance sheet as we sort of progress ahead.

So let me take you into FY '22. And really, we're probably summarizing this just getting into a little bit of detail. So clearly, One of the things that we've done is been transformational. We have scaled up considerably. Our top line growth has been 46%, so our portfolio has expanded in every area and all businesses have grown in their own right.

Clearly, everybody knows about the supply chain constraints globally, and we've managed that really well. So we have successfully invested in inventory, which did increase our inventory levels by about $1 million, but that allowed us to [ meet ] our supply lines. So this is not acquisition-based inventory. This is just an organic-based inventory.

So clearly, as supply lines improve, our turnover factor of stock will come down because supply lines become a lot tight or short, I should say. We've got really good business fundamentals today. Our competitive position is very strong and something that we found now that we're winning tenders and we're getting invited to tenders that we haven't been involved with before, and I cover this a little bit further.

But recently, we've won another 3 tenders, which have given us great momentum into this year. And this is on the back of the 6 that we won in FY '22 that are still getting rolled out. So we feel comfortable there's lots or multiple drivers, not only from organic growth from the capability we've built. But also, there's still a lot of uptake to come from integrations of acquisitions that have been taken of recent times. From a sales point of view, really, there's 4 key areas.

So one of the questions that was asked to me recently is what's our organic growth. It was 21% for our business and $19 million contribution from acquisitions that were made in FY '22. Clearly, $55 million in the second half of FY '22 versus $47 million in the first half is great. We're really pleased with that.

Typically, our second half is stronger anyway. So we would see that, that will continue, and that's been demonstrated over the last 4 or so years. So the 4 key areas we look at, I guess, and of the interest to stakeholders is a product mix. So industrial is a wide range bucket of an endless assortment almost on products. So that will always be around about that 60% level. Safety, which is head to toe, protective safety equipment as well as in the clothing and boots and gloves and so on. That sits in 15%. Followed by workplace, which is general consumables in any workplace and truck and automotive. That profile will change over time as we obviously penetrate new markets and we cross-sell across our different businesses.

So on the right-hand side, you'll see more of this operating segment. So business, consumer and members. So how we treat business customers walking online and in-store for retail elements and the members, there will be a mix change over time. We will always see about 75% plus in the business segment. That is our key core business, will remain that. The balance of it will be a growth area, but it will always be from total revenue about that split.

From a regional point of view, we did sell down our investment in BSA brands in UK which we launched in 2019. And the reason for that was basically to work with our joint venture partner, but was sold to a large U.S. private equity group that had global ambitions. They have about a $2 billion turnover now and it makes sense for them to acquire that business. But also for us, with the way that the U.K. market has been in the last 2 years, but clearly that was going to be a bit of a flat line going forward, I would say. So we brought our focus back into Australia.

And from an end market point of view, we have a really nice I guess, split across a whole diversified range of areas, and our online sales has continued to grow as well. So the achievements this year, 3 acquisitions, Skipper Transport Parts, United Tools Buying group. So if you think -- and also the store of Albany United Tools. So if you think about Metcash as a corporate company and you think about an individual IGA owner operator store, that's how that particular model sets itself up.

So we've added 6 new company stores, 27 independent retailers. We are now on 8 new on-site stores. We did divest 9 because they weren't profitable or we didn't feel that we could get to the level that would give us a satisfactory return on our investment. 70 new people as well as 3 new online channels. We went from 5,500 customers, 2,500, and that's obviously clearly supported by the categories of truck and automotive. Tooling offer, we're one of the largest in that space.

Now in Australia, with the whole new product range, new supply depth as well as our inventory has expanded. So the most important value for that is at its embryonic stage is the ability to be able to cross-sell across the portfolio. When we acquired Skippers, we redesigned and consolidated our warehouse at [indiscernible] in Perth, and we merged those two operations into one. Clearly, this is where the benefits of synergies and integration appeared. Skippers, we also put on and migrated on our ERP system. And that is the first time we've done that with our acquisitions. We've acquired the other businesses with our own ERP. This is the first time that we've come across. So I guess that is more comprehensive in its effort than the other acquisitions. And then we are probably a little bit slower than we would have liked to get the uptake that we would like. We invested in store upgrades.

We acquired and moved into new premises in Kalgoorlie, and we continue to drive the efficiency in our technology area, which clearly supports the growth of our business and underpins our solutions model. So with that said, we've made all these acquisitions over the last years. And what's worked well and what still needs some work, we've grown exceptionally well. Green Ticks, obviously where we would rate ourselves highly. The Orange ticks are where it's in motion, and we expect the right outcome. The red ticks, it's underperformed where we thought it would be or it's not above plan.

Now we're really comfortable about where it will be. But when I spoke about the acquisition of Skippers and the ERP and the consolidation into the distribution centers, the regional locations that they're in hasn't performed as well as we would like, and we've gone through cleansing phase. We will complete the integration of that over the course of the next 6 months. It will be a number of locations being co-branded and more stock that were all wider stock in those locations.

So we expect that to correct itself. But clearly, we're a little bit disappointed that it hasn't delivered where we are at. One other good things, so it is a high-margin business. It is an attractive business. It clearly is getting a number of different customers in store. The ability to be able to grow that, we feel really confident with.

And this slide is the first time that we've actually showed it through stakeholders in terms of where we feel satisfied from a business point of view. I'm not going to go through this in great detail, but we dropped this in for -- and if you go to the presentation, we dropped this in so the people will actually understand what is occurring in our business, which is really supporting where we think the ticks are in the slide before.

But by doing this with the acquisition, you're getting an underlying view of what we believe are the key attributes of great performance and the opportunities as moving forward. So from a financial point of view, revenue already spoken about. Gross profit continues to increase, from 29% to 30%; 4 years ago, that was at 18.4%. So we -- the decisions we're making -- and clearly, we're getting the uptake by scale, and we expect that to be higher and continue to be higher as we move forward.

We have got a record underlying EBITDA. But clearly, we continue to invest quite a bit of that into the transaction cost of the acquisitions, we've also all those movements that I mentioned earlier around the ERP implementations and the warehouse reconfigurations and the store upgrades and all those things, which are really important to our future. Clearly, we've invested in those, which brings our net profit down considerably, though the purpose of outlining our strategy in the beginning of this presentation is to demonstrate to you why we're investing and how we're investing and where we think we'll be in the future.

So we're really, really pleased with our efforts over the last 12 months, it is transformational. Clearly, we're on a pathway to 2025 and beyond. So all this is continuing to build along that pathway.

From a balance sheet perspective, we spent $4 million for purchase price of acquisitions without the integration cost of that. The net CapEx, including intangibles, was $1.3 million. We have $7.5 million of available working capital facilities, and net debt did increase. And I'll cover that in a couple of slides.

And our gearing is at 40%. So 25% to 50% is the range of acceptability. Our view has been debt has been a much cheaper than a capital raising rights issue or anything else. So we've deliberately taken that pathway. But obviously, we have made sure that we've been really disciplined around our cash management, our capital expenditure, only investing in those areas who bring future value back.

But also at some point in the future, we are not going to continue to acquire debt, expecting our results to be different. We need to now work our balance sheet hard and invest and deliver on the areas I've already mentioned. So this is really just the breakdown of our cash flow.

Clearly, you can see that most of our cash has been invested in the acquisitions, which has changed our debt profile. And also, we continue to invest in technology, which is with 6 websites and also our online, on site -- sorry, on site stores has given us a point of advantage. So there's not much else to probably discuss there. But clearly, as our focus on cash comes down, we will look at reducing our interest rates. So our interest rates will increase. Clearly, we want to manage that closely and cash inclusion is obviously a key driver behind that.

From a balance sheet perspective, you can see on the right-hand side that our inventory has grown, and that's obviously grown through acquisition organic pathways. It's the right balance for our type of business today. If we have the stock and it's available in the right place at the right time for the right customer, then we'll get the sale. That's what drives people to our stores. That's what drives people to our sales reps and also to our online program. So we've got to make sure that that's the case.

From a debt point of view. So we had, as you can see on the top right-hand side, net $21.4 million worth of debt, $10 million worth of debt in FY '22. And the majority of that fundamentally sits behind the acquisitions of C&L Tools in December '20, Skipper Transport Parts, United Tools and [ Übernahme der ]United Tools at Albany. So all those together around about $9.5 million in purchases, but we've also spent a couple of million dollars in addition to that on-boarding, integrating and making sure that we obviously are leveraging those platforms.

So we're really comfortable that our decisions around debt has been delivered. But obviously, our focus now moving forward once we get past the integration phase for the next 6 months, as I mentioned, is about bringing that down, and we will bring that down, and we will continue to focus on that area.

Okay. So if we cover the couple more slides left. From an investment strategy, if we're looking forward mid- to long-term horizon, we have our current business. So more customer value. Inflation is obviously a key focus for us around people and also around the cost of supply chains, deploying our synergies and integrations, merchandising, which covers our products ranging, our stores and how we operate.

We will continue to optimize our store network, and that will be co-branded locations. And Port Hedland, Karratha, Albany as well as Kalgoorlie, Bunberry in Western Australia will become co-branded stores over the next 6 months. And automation for efficiency is really important, particularly as we've got a number of acquisitions.

So our strategic or emerging focus is the 3 business segments, the business rigs or consumer as well as member. We're going to consolidate where we are consolidating all our major suppliers into 1 operating division, and that single operating platform allows us to leverage the commercial arrangements with our suppliers better, become deeply -- more deeply engaged. But also, we expect our margins and our relevance with our suppliers to be stronger.

The expansion of our store formats as well as the expansion of our product range is still a key focus. And we look at -- we are looking to double our store outlets over the next 3 years to take it to 150 plus, so that's the target. Clearly, all that gives us the ability to have a good strong organic growth pathway around profit and cash, but also closer and focused on the customer, stronger supply chain. We're stronger with our suppliers.

We've got a really good connected network that's vertically integrated. So you would expect that a business that we're building is a market leader. So more targeted acquisitions. Clearly, we will look at other acquisitions that are value creative. United Tool store members in the right location for the right reasons, we will look at that. And there's the ability also, I guess, to consider our franchise model in some sections in the future.

We have an 8% EBITDA target, 5% net profit. We're going to be disciplined with our investment and cash generating. So that's our measurement. From a growth funding perspective, we've always said that bank support of our working capital is really important. That's the pathway we've taken, and we see that happening. And clearly, we will consider inside and outside investment as we go forward to support strategic initiatives.

And also, the ability to be able to make sure that we can maximize the organic opportunities that are within our business today, which are quite material in the time line. So the current environment, we -- but first, this is the slide that I've been putting in the investor deck. First seven weeks have been strong. We had a really strong August. We had 16% of our staff away with COVID in July. So that did keep us down in our sales in that month. Though we're still having a run rate around about $108 million after the first 2 months of trading on an annual basis.

All businesses still really well positioned. We find that there's a number of initiatives underway that, as I mentioned earlier, the new contracts that are coming on that will help. We are really focused around our people, particularly retaining and training and new training programs have now commenced within our business for 31 different employees that are working through formal certificates of training.

But clearly, we're putting reward structures in place around our people to incentivize them to be a destination to stay and the destination to come to. Our focus clearly is on stock and supply chain. So whilst they are starting to get back to a little bit of normality, there is some categories that still are problematic or delayed. So we are going to focus in FY '23 of reducing that amount of inventory that is in place.

So growth in all areas, synergies. There is market uncertainty, we're really focused on the rising cost of supply chain and people. And clearly, we're going to be adjusting our price points to benefit from inflation. All our markets are strong, particularly in resources and transportation. But we -- clearly, with the building sectors and so on with the individual trades, there's a high demand there as well as infrastructure.

We will continue to invest. But clearly, our investment is now at existing operations and expanding our own existing portfolio or platforms that give us a stronger competitive position. We are going to remain with our long-term focus and clearly, we're well positioned, we believe, for driving long-term returns to shareholders. And our focus is really about creating value for shareholders, but also making sure that we have a really good, strong market position. Our commitment to high standards and being a company that is a destination for customers is really important and consistent.

We are now working really hard about building a low-cost operating model as well as continue with our capital-light pathway. And clearly, our focus is on financial performance. So we know that we need to generate more profit. We know that we need to generate more cash. It's been a deliberate strategy. And clearly, our strategy after the next 6 months will be in those areas. So we feel confident about where we're heading.

But it has been deliberate, and there's been a number of -- or a bit of rhetoric around our financial performance in terms of our profitability, but I don't think people understand what our story line is.

So with that said, what I'll do is I'll open it up for questions. And hopefully, we've been able to give you a pretty good summary of our performance in FY '22, our strategy historically and also where we're heading over the next 12 months and 3 years. Thank you.

[Unknown Executive]

Thanks, Mike. Investors now have the opportunity to ask questions of Mike using the questions function in the go-to webinar that you're using to view this presentation. Please launch your questions for Mike to answer now.

The first question, which was launched previously is you have [ spelt ] ambition to make more acquisitions and reduce debt at the same time. How you will achieve that?

[Michael Arnold, executive]

I think I answered that in one of the slides already, just take us back to that. So on the right-hand side on the bottom, clearly, we've got good bank support with working capital. But we will look at inside and outside investment through covering strategic initiatives.

But we've got a really big history of finding the right acquisitions at the right price and then leveraging those. So I think importantly, that's what we'll do is we'll consider the acquisition and we'll have a blend of inside, outside investment as well as our banking.

[Unknown Executive]

The next question is, can you please provide more information on how both COVID and the current supply chain issues impacted Stealth's FY 2022 results, either negatively or positively?

[Michael Arnold, executive]

Well, positively, we obviously benefited by having stock. So from a cash point of view, we outlaid an extra million dollars. So having that stock also allowed us to buy better and increase our gross margin, and also been able to retain our customers.

So our supply lines were strong. And clearly, that supported our organic growth of 21 odd percent. So that's where the management of our supply lines, which we got into really early, has been strong and consistent with dedicated inventory teams making sure that we are buying better, we have the stock in the right location, and we're generating high margin.

[Unknown Executive]

There are no further questions. [Operator Instructions] It doesn't look like there are any further questions. Mark, if you would like to summarize and wrap up.

[Michael Arnold, executive]

Okay. Well, look, I appreciate everybody's attendance, and this will be recorded. It will be available for people to see and go through afterwards. If there's any questions that you think of after this presentation, send it to [e-mail]. We will look to answer that.

We've got a really exciting pathway. Our share price, clearly, we have had 2 different parties provide a target of about $0.33, between $0.27 and $0.33. We see a 12 or 11.5. Clearly, we're undervalued. So what we're looking for is support, not only from existing shareholders, but I'll be pushing hard to continue to tell our story and get new shareholders in our business. There will be some [indiscernible] that will be coming up in the near future. And we look forward to a really exciting FY '23, but more so '24 and '25 period. So thank you for your attendance.