Paul Sanger:

I'm Paul Sanger for the Finance News Network, and today I'm talking with Stealth Global Holdings ASX Code SGI, and they have a market cap of 23 million. Stealth is one of Australia's largest distributors of industrial maintenance, safety, and workplace consumables products, providing a wide range of more than 1 million products, supplies, parts and accessories to businesses, trade and retail customers across a network of 70 independent retailer and company owned store locations. Stealth serves customers of all sizes from a broad collection of industries, including commercial mining, resources, industrial, government, transport, automotive, agriculture, building, construction, manufacturing, engineering, as well as trade and retail consumers. We welcome Stealth CEO, Mike Arnold. Mike, welcome.

Mike Arnold:

Thanks Paul. Every workplace might be easy.

Paul Sanger:

Absolutely. So Mike, let's kick things off with a question about your recent results. The company has delivered a record FY23 result with revenue up over 11% to a record 111 million and EBITDA increased by 32.5% to 5.3 million. Tell us how the company delivered this result.

Mike Arnold:

Yeah. Well, simply after seven acquisitions over the last five years, it's been really important to have the back end and all our systems integrated. So we've spent a lot of time, I guess in FY23 working through consolidation and consolidation in itself has allowed us to become more efficient and remove a lot of the duplication. So part of that has been we've reduced our head count by around about 24% overall through natural attrition and because we're more efficient, we're able to bring through the volume. So our cost to serve is a lot less and in doing that, obviously we are starting to get the results in the bottom line.

Paul Sanger:

And to what extent was this result delivered from organic growth versus acquisitions?

Mike Arnold:

Well, from an acquisition point of view, interestingly, we spent a lot of time... We closed eight stores that we acquired in the year before. So there was roughly $8 million worth of revenue that we removed from the business on an annual basis and from an organic point of view, we've been growing at an average of 25% CAGR over the last three years, and we see that continuing and obviously in a high growth business as we've got more consumables available, there's the ability to upsell in every possible one.

Paul Sanger:

And also the FY23 results also showed an improved cash flow results and lower net debt. Does this now give the company further flexibility to drive growth going forward?

Mike Arnold:

Yeah. Look, that's one thing that we've really worked hard on. So I think reducing our inventory has been really key. So if we had to maintain the same percentage from an inventory point of view, which was at 16.1% two years ago and it's now at 13.3 of total sales, we would have an extra $3 million worth of inventory. So we've become more efficient there and clearly the way that we collect and the arrangements that we have in place and also having retail business improves our cash flow as well. So I think in doing that, we expect from an operating cash and a free flow cash that to continue, more so in the second half than the first half. The first half is always because just key dates is always an issue, but the second half is where we pick it up.

Paul Sanger:

Fantastic and has the company identified further M and A opportunities and what is the competitive environment looking like?

Mike Arnold:

Yeah, we have. We've been open in saying that we're actively looking to continue to grow our business. So we have our target of $200 million in turnover by 2025. There's about $60 million of that organically we've identified that we expect to drop in the next 12 months but we absolutely are looking to continue to grow our footprint, grow our marketing position, have double the number of stores, and to do that, it's a combination of organic and acquisitive growth. The industry absolutely is going through a consolidation phase, so I see lots of opportunities there for us. We do look at them actively every week. However, there's probably two or three that I've walked away from because just it didn't add the value and the return on the investment we wanted. So it absolutely has to be the right acquisition for us these days.

Paul Sanger:

A very disciplined approach might say.

Mike Arnold:

Yeah. Thanks.

Paul Sanger:

And what are you currently seeing in terms of any inflationary pressures and supply chain stability and how are you managing this?

Mike Arnold:

It's ongoing. I guess if you look at what the supermarkets have done, how there's been about a 24% increase in general, just everyday produce and we're not distant from that. We have stores, we have people, we have operating systems, we have suppliers. Obviously their cost of goods have gone up, so we've had the same thing but in doing that, we have completed a pricing reset on three occasions in the last six months to combat that. So our gross margin percentage has sustained itself and importantly, 95% of the product we sell is non-discretionary. So the beauty about that obviously is we can match supplier increases as well as feeding that down chain, but everybody's in the same boat. So we're still really competitive in our pricing. We're really cognitive of how we pass that on, but we also have a responsibility to make sure that we maintain our gross margin levels.

Paul Sanger:

And are you able to give us an update on the progress with fully integrating the acquisitions Stealth has made over the recent periods and extracting potential synergy benefits?

Mike Arnold:

Still lots of synergies available, which is good, which is good. Particularly, as I said, the $60 million of existing revenue that is within our group, but doesn't actually come through as revenue in our organization from an income recognition. So we see that coming throughout a potential 260 million. So it's actually quite conservative, but the integration, we're going to two operating brands from the 1st of March. Heatley's will be called Heatleys Safety Industrial and Automotive and the Skipper Transport Parts business will be removed and made dormant. We've just consolidated both the Skippers and the Heatley's ERP and all the data on one platform from the 1st of December. That's just recently gone. So that went seamlessly, which obviously is a surprise to everybody, I think, who's done that but importantly, we want to invest more in a couple of key brands.

So we see ourselves as we go forward, probably two main brands, one in the business space, one in the retail space and single IT system, single brand coverage. You can invest more into those brands than obviously multiple. So I think there's efficiency automation, the rise of AI is important, but equally at the back end, our efficiency to streamline everything and make that saleable through one operating system from end to end should absolutely improve our profitability by another three or four points as we head over the next 18 months or so.

Paul Sanger:

Fantastic. Now we touched on numbers earlier. You are obviously making a decent EBITDA numbers. Can I ask, what's the company's dividend policy going forward?

Mike Arnold:

We've committed to putting a dividend out in FY24, which after five years is I think a pretty good result. We're obviously balancing that with working capital requirements and investing in the future. What we've looked at is free-flow cash and said, "Okay, well if we're generating free-flow cash, then there should be an element of that that goes back to shareholders, particularly the ones that supported us when we floated," but importantly, it allows our business to be looked at differently and it probably gets a lot more investors involved that typically wouldn't get involved in a company like ours unless we had a dividend policy in place.

So we haven't come up with a fixed and firm amount at the moment, but we will absolutely by March or April but we're absolutely committed to it, and we know that for us to be an investment of choice, we need to make sure that we're putting ourselves in that type of environment so that if people have an opportunity to invest in us and receive a return on that investment rather than an investment in us that they're not, then I think we'll be a better choice.

Paul Sanger:

Fantastic and look, Mike. It's already December. The year is nearly over. Perhaps to finish up today, let's look forward to 2024. Can you give investors a bit of an idea of what they should be expecting in the early months of next year from Stealth?

Mike Arnold:

Well, the first half is good. So we expect about a 55 to 59 million revenue range in the first six months, which is up from 52 million last year or like for like, but in saying that, there's four and a half million dollars of that is not recurring revenue because it's through those closed stores. So we're actually probably up about 14 or 15%, which is great. Our margin is in the next six months. So we have three new contracts that we picked up to start in March, $9 million on an annual basis. So that's actually an additional contributing factor to us.

So we're expecting a better result in 24 than we did in 23 and everything's building to what we've always given as a 25 sort of revenue and EBITDA number. We're really conscious around interest rates and debt management. So we will be, from a fixed debt perspective, we'll be debt free by June 30, which is again, is a great outcome for our business and then it's about managing the working capital element of that, which our main asset is inventory. So we'll continue to invest in inventory, getting it close to the customer, and we expect double-digit growth in all areas. So we're really excited about where we are heading for the next few years.

Paul Sanger:

Lots of good things to look forward to.

Mike Arnold:

Lots, yep.

Paul Sanger:

Mike Arnold, been an absolute pleasure. Thanks for your time today.

Mike Arnold:

Thanks.

Ends.