Cencora, Inc. Price & Performance (COR)

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Good morning and welcome to Adbriar's 2023 full year results presentation. I would like to commence today by acknowledging aboriginal and Torres Strait Islander peoples as the traditional owners of the lands and waters of Australia. Recognize their continuing custodianship of country and culture and pay respect to the elders past present and emerging. Joining me today is Jared Gashel, our Chief Financial Officer. The full year report and presentation have been lodged with the ASX this morning. The slides will also be visible via the webcast for this briefing. In terms of the agenda, I will provide a brief snapshot of the business our 2023 highlights as well as address our safety and sustainability progress. Jarrod will then run you through our financial performance before handing back to me to take you through our 2024 priorities and outlook. Finally, there will be an opportunity to ask questions. As you can see, Adbright has a strong presence across the Australia and produces a diversified collection of products. We supply high quality and low cost construction materials to customers in the commercial, residential mining, engineering and infrastructure sectors On this slide, we have also included our revenue by state and product In 2023, Cementitious Materials accounted for 39% of our revenue.

Followed by concrete at 33%, Both lime and aggregates account for 10% respectively. While Masonry makes up 8% of total revenue. Our geographical diversification has also held us in good stead allowing us access to varying markets and sectors across the country which better positions us to withstand changing market conditions. Our strategic pillars of safety, customer focus, inclusivity and sustainable growth remain at the center of our decision making at Adbri. I'll now take you through our financial results for the full year ended 31 December, 2020. Right. In 2023, company achieved strong financial results. Underpinned by a 13% increase in revenue Adbry's significant business turnaround helped deliver a 30.9% uplift in underlying EBITDA when compared to a year earlier. Solid price traction across all product lines together with cost discipline, delivered an underlying EBITDA margin of 16.2% up 220 basis points. Underlying EBIT also increased significantly up 44% on the prior year to $175,000,000 Underlying NPAT was up 43.8% at 111,700,000 dollars while statutory NPAT decreased by 9.5% to $92,900,000 reflecting the $46,200,000 dollars of property and Rosehill Plant property and equipment earnings recognized in that prior year. Improved underlying earnings performance highlights the effectiveness of operational efficiency initiatives that have been implemented during the year as we continue to reshape and refocus our organization.

Jared will take you through these numbers in more detail shortly. Advair made significant progress on key operational and strategic initiatives during the year. We delivered operational efficiencies through our new decentralized business model supported by a strong leadership team. A focus on delivering value through cost management and best in class customer service is underpinned by this decentralized operating model now firmly embedded throughout the organization We expect our Kwinana upgrade project to be operational by the end of 20 20 supporting operational efficiencies and future growth in market demand. It's important to note late in the period that AbbVie received a non binding indicative proposal from SierraH and the Barrow Group to acquire 100% of Adbri's shares not already held by the Barrow Group for $3.20 per share in cash Today, alongside our results, we announced our entry into a scheme implementation deed with CRH. I will address this later on in the presentation. But let me first cover our improved safety and sustainability performance. The health and safety of all of our workers including our employees remains the highest priority at Adbry. Our total recordable injury freak [indiscernible] We continue to see positive trends in other key safety lead and lag indicators with visible leadership walks doubling year on year, and critical control verifications increasing significantly.

But we still have a way to go. In my opinion. We have also put an emphasis on improving cyclograding and pleasingly we are seeing positive results from this focus. We remain committed to our goal of net 0 emissions by 2,050 and make good progress towards it in 2023. In our ongoing efforts to reduce emissions, we signed a long term agreement with CSL to supply and operate a new hybrid diesel and electric battery powered limestone transport vessel by 2026. We expect the new vessel to reduce our emissions by about 40% compared to the current emissions of the Accolade 2 operation. We will also continue to phase out coal as a kiln fuel at Munster to reduce our emissions, while in South Australia received approval from the EPA to increase refuse derived fuel or RFD usage at Bergenhead. Importantly, already produces the lowest embodied carbon type GP cement verified in Australia. And we're always looking to improve our carbon footprint We're doing this through innovative new products like Future Crete and Evochem, which we had launched during the year. 2023 saw the introduction of the federal government's safeguard mechanism reforms which we actually engaged with the government on and as previously indicated These reforms are not anticipated to have a material impact on our earnings based on this current legislation.

As you can see, Advair has made good progress against our short term 20 20 targets supported by our ongoing alternative fuel strategy grid decarbonization and the increasing use of supplementary Given our short term targets are approaching their end, we will set new targets this year aligned to our existing medium term targets [indiscernible] Our goal will be net 0. By 2,050. I'll now hand over to Jared.

Thank you, Mark. I will now take you through our financial performance in 2023. Pleasingly, have made good progress against all key financial metrics. As Mark mentioned, on an underlying basis, we have delivered a significant improvement in profitability. Driven by a strong focus on pricing and cost discipline across the business. With the group's EBITDA margin increasing 2 20 basis points to 16.2% and returns on funds employed increasing by 200 basis points to 8.5%. Moving to product performance. Cementitious revenue increased 7.8% in 2023. The 3rd consecutive year of growth. With volumes increasing by 2.8%. This performance was driven by strong demand across most sectors. The average selling price of cementitious products increased by 8.2% demonstrating our commitment to pricing discipline. Inflationary pressures although moderating, continued to impact energy and raw material costs. [indiscernible] have installed a new more efficient kiln burner at Birkenhead that is providing a 5% clinker gas consumption benefit. And we also received approval to increase the usage of refuse derived fuel the calciner with up to 100% substitution of natural gas now possible.

Revenue for Lime increased 9.6% primarily driven by improved pricing, with the average selling price of lime products increasing 14.6%. Demand for Lime was negatively impacted by higher rainfall across the winter months in Western Australia as well as several mine closures. This resulted in a 3.4% decline in volumes a trend that is likely to continue given the evolving landscape of the Western Australian aluminum market. Moving to Slide 16, revenue for Concrete increased by 20.3% on the prior year driven primarily by price increases implemented in second half of twenty twenty two, and early 2023. As well as a 2.4% increase in volumes. During the year, we opened 2 new concrete plants, 1 in Rosehill to service the growing Western Sydney region replacing the plant that was compulsory acquired by the government and one in Pakenham to supply the outer Southeast Melbourne Growth Corridor. Substantial inflationary costs continue to impact our operations particularly fuel and raw materials. Moving to aggregates. Aggregates demand has continued to grow year on year. With a 2% increase in volume in 2023. Infrastructure project revenue for the year was strong. Underpinned by supply of material for the Western Sydney Airport is the C2C project in Queensland.

The average selling price of aggregates increased by 14.4 percent helping offset heightened production costs. Due to the inflationary environment. Masonry revenue increased by 9.1 percent driven by a significant increase in contracting revenue as well as price increases. Product volumes 3.8% lower than the prior year with lower retail and residential demand. Moving to joint ventures, which accounted for more than 9% of our EBITDA in 2023. Across the joint ventures, revenue grew 8.5% and earnings grew 20.8%. To 29,000,000 with strong growth in ICL, and MOSSS, partially offset by SunStay. The group's look through EBITDA for 2023 which takes into account the joint venture's EBITDA, was 348 [indiscernible] Turning to Slide 19, The EBITDA bridge highlights the continued inflationary environment in which we're operating. Energy, freight and labor all remaining at elevated levels. Despite the inflationary pressures, our focus on price realization together with operational efficiencies, has helped drive [indiscernible] to 311,000,000 dollars or 30.9 percent higher than the prior year. Turning to our half on half earnings trends. Pleasingly, our margin recovery continued with the second half of twenty twenty three delivering an EBITDA margin of 16.2%. Moving to cash flow. Operating cash flow increased by $48,600,000 compared to 20 22.

Primarily due to improved trading performance, with net working capital slightly unfavorable due to the timing of payable payments in the current year. [indiscernible] Free cash flow free cash outflow of 104,700,000 dollars was in line with our expectations. Given the elevated investment in the Quinana upgraded project in the year, which totaled $165,800,000 Cash generation cash conversion and disciplined capital allocation are key focus areas in 2024. Moving to capital management. Leverage has improved to 2.2 times down from 2.4x in 2022 and is trending towards our target range. Notwithstanding the improved leverage ratio, the group's net debt level increased by 105,500,000 dollars primarily driven by the elevated investment the Quinana upgrade project as previously discussed. [indiscernible] the group has substantial liquidity with more than 356,000,000 dollars significant bank covenant headroom a weighted average debt maturity of 3.60 years and no near term renewals. As noted earlier, returning the leverage ratio to less than 2x is a key focus for me and the team. Turning to capital expenditure. Capital expenditure increased from $255,100,000 in 2022 to $316,200,000 with the increase driven by the continued investment in the Quinana upgrade project. Capital spend for the period was split between stay in business capital of 128,400,000 dollars and development capital of 187,600,000 dollars with 88.4 percent related to the Quinone upgrade project.

Stay in business spend increased by $4,700,000 over 2022 with shutdown capital across Cement and Lime, construction of the Rosehill Concrete Batching Plant, and fleet replacement driving the spend. Moving to Slide 24. The chart on the left summarizes the group's financial framework. Starting at the top of the chart, a key focus area for 2024 is improving cash generation. Through improved operating cash flows, as well as capital optimization cash flows including through property initiatives. Moving to the middle of the chart, The delivery of the Quinlan upgrade project and efficient deployment of stay in business capital are priorities for the group in 2024. The combination of disciplined cash generation and capital allocation underpin our commitment to maintaining a strong balance sheet and restoring our leverage ratio to less than 2 times. Turning to Slide 25. Which outlines how we think about our property portfolio. With a focus on surplus properties. The company's property footprint will continue to evolve as we invest in our network and optimize our operations. Once a property is deemed surplus to our operations, it is repurposed and the highest and best use is determined. This might include holding for recurring earnings, divesting and recycling capital, or long term development.

Moving to Slide 26. This slide showcases 3 properties currently under assessment for highest and best use opportunities. I will now hand you back to Mark. To address the strategic priorities. Thanks, Jared. A few of our strategic priorities have already been touched on but I'll now address them in more detail. The Kwinana upgrade project continues to be critical project for Adbri to strengthen and consolidate [indiscernible] in Western Australia. [indiscernible] we have invested $265,000,000 in the project and it is over 70% completed. We are tracking well against our project timeline and expect the facility to be operational by the end of 2024. In 2023, we made good progress towards the completion of the construction of the site and we recently achieved key milestones of silos tanks A and B being installed [indiscernible] Grade is projected to deliver. Annualized cash savings of $21,000,000 as we consolidate our 2 cement operations in Western Australia to the one site at Kwinana. In 2023, Advair commenced a review of its Lime operations with the view to improve asset performance and customer offering. In that time, the West Australian market has evolved demonstrated by Alcoa's recent decision to curtail production at its Kwinana refinery.

Elkoa's Kwinana refinery is an important consumer of quick line. The West Australian market estimated to have used approximately 100,000 tons of quick quicklime in 2023. Advise in negotiations with Alcoa regarding its supply agreement, which expires in October 2024. The West Australian Lime Review will consider the changing demand profile from customers in the alumina and mining sectors especially nickel, gold and rare earths with a particular focus on assessing optimal productions at the Munster site, having regard to future lime market demand and key customer negotiations, evaluating the business case for potential lime import facility at Munster, utilizing existing silo and storage infrastructure, adopting a hybrid supply model capable of bringing additional grades to the market and analysis of opportunities for Advise Surplus Land Holdings at Munster. As I touched on earlier in the sustainability section, in December, we announced we had entered into an agreement with CSL to replace the MV Accolade in 2026. Abra will have 1 of the world's first hybrid battery electric capable cargo vessels as a limestone carrier. This new vessel will provide major benefits compared to the Akalade 2. Including reducing our scope 1 emissions for limestone transport by about 40% and allowing us to transport up to 2,700,000 tonnes of limestone per annum representing 35% more carrying capacity than the current vessel.

To accommodate this new vessel, upgrades to the Cline Point and Birkenhead ports are planned at a total cost of approximately $26,000,000 out to 2026 In parallel to this, Advair has commenced a business review around expanding the plant milling and blending capacity at Birkenhead. This FEED study will be complete by early 2025 and if approved, any significant capital investment would be expected from mid-twenty 25 [indiscernible] this additional production commencing, from 2026 Together, these initiatives support the decarbonization of our operations create efficiencies and enable greater supply of lower carbon products to the market. As you are aware, late last year, we to acquire 100% of Adbro shares not owned by the Barrow Group. At a price of $3.20 cash per share representing a 41% premium to the undisturbed closing price on 15 December 2023. Today, following CRH's completion, of confirmatory due diligence, we announced that we have progressed the transaction with CRH. By entering into a scheme implementation deed at the best and final price of $3.20 cash per share. The Independent Board Committee established to assess the offer has unanimously recommended shareholders vote in favor of the transaction subject to the independent expert concluding the offer is in the best interest [indiscernible] This slide lays out some of the high level steps to come.

A scheme booklet will be provided to independent shareholders in due course. And will include the complete timeline and independent expert report. At this time, shareholders do not need to take any action and will keep shareholders informed. And now onto our priorities and outlook for 2024. I am presenting this slide to you having just acknowledged we are progressing this scheme implementation deed with CRH. However, management remains acutely aware of our responsibility to shareholders and the community This year, we will focus on completing the Kwinana upgrade and transitioning our Monster Cement operations to the new site. Provide an update once completed. In 2024. In concrete, Aggregates and Masonry. Will continue to optimize supply including concrete, plant upgrades in South Australia embedding our new concrete batching plant in New South Wales and expanding our general limestone silo capacity across the network. We will also continue to organically grow our masonry contract [indiscernible] Across our business, we're continuing to improve safety and that remains a key priority in 2024. As we touched on earlier, we will also focus on disciplined capital allocation. Improving our cash conversion developing our 2025 2,030 ESG targets to align with our net zero emissions roadmap.

So finally to the outlook to close today's presentation. Adebro expects demand for its products will the exception of lime to remain strong and broadly in line with [indiscernible] [indiscernible] pricing and cost discipline to support margin expansion, in FY24. Finally, we expect capital expenditure to be between 270 [indiscernible] inclusive of the Kwinana upgrade project which now has a lower capital cost estimate between $370,000,000 $400,000,000 With that, I'd now like to hand back to the operator and open up for questions.

Thank you. We will now begin the question and answer session. And today's first question comes from Keith Chau with MST Marquis. Please go ahead. Good morning, gents. Just a for me on the strategy around Concrete.

Obviously, the market is conducive at the moment. To plans adding concrete capacity, the majors, I think, are seemingly willing to cede share and what is a very strong price environment So just trying to understand what are some of the dynamics you're seeing as you put on these new concrete plants your demand for concrete, how you're winning customers? And whether that win of new customers is based on price geography, etcetera, etcetera? And how long do you think there is runway for growth from a concrete perspective please?

Good morning, Kate. It's Mark here. So it's a really good question. So how do we think about it? You always break your concrete market down into the submarkets. So let me start with South Australia. We are investing a little bit of capital this year and some organic growth So increasing the capacity at a couple of a couple of our plants, we think that there's good growth in the residential market in South Australia. We also think in the next couple of years some really good growth in the infrastructure market in the infrastructure markets in South Australia.

So [indiscernible] [indiscernible] growth within the market itself. So that's a real positive. If I also turn to Europe markets on the East Coast of Australia, again, they're all different. But we're well placed in in Victoria. That's a market where we're maintaining our position for one of the one of the phrase compared to South Australia. We're actually we're investing capital We've just we are commissioning and have commissioned our plant in New South Wales in Rosehill. And we're looking at further footprint opportunities in New South Wales. And in Queensland, we're just building out capacity. So and we're confident that the market is growing organically and so we certainly don't So we think we do that for the reasons that's mentioned. The other thing I'll also flag is that through Future Creek, which is a concrete product, And EvoSem, which is a cement product there's a real demand out there for a lower embodied carbon concrete product. And what's interesting at the moment is that what we're producing and selling into Victoria and New South Wales is being consumed by ourselves in terms of this lower carbon embodied product. So we think that there's growth there as well.

So we're doing it through strategic positioning some organic growth, looking for new opportunities, as well as through product differentiation. So thanks for the question.

Thank you, Malcolm. And just maybe a Sikkimod just on your development application or ICL for a new cement grinding facility in Geelong. Wondering how that's tracking strategically How do you think that changes the position for the business going forward?

Yes. So I think the view we do have a view that there is good demand in the long term. For again what I call a lower carbon embodied product in ultimately in cement and in concrete. Clearly, that's part of the combined thinking. Of the shareholders of ICL being the Barrow Group and [indiscernible] But that's very early stages. A DA is an application The study itself is embryonic But what we are also doing and you have to understand the complementary nature of is we are sort of doing a study, which we are commencing and have commenced in South Australia around again, how to increase capacity at Bergenhead which again gives us market opportunities both in South Australia and potentially into Victoria [indiscernible] 2 separate studies at different points of maturity, Keith.

Okay. Thank you. That's very clear. Maybe if I'll squeeze one more in. Just on the lime industry, clearly, Alcoa is shutting down, one of the refineries is a bit of a game changer for line supply and you've recognized that through a review of the Lyme assets. Can I make the assumption that a single count going forward will be the best way to handle the change in the market And when you talk about importing supply into the market, you need to import supply to supply Alcoa if you get another extension or will those just be your flex volumes in your network going forward? Thank you. [indiscernible] [indiscernible] give or take. It is a market that's growing, we think. Notwithstanding the Kranana curtailment announcement, So we think over time, there's growth above 1,200,000 tonnes So the reason that we're doing a review is we think it's really around what the market needs in terms of product requirements So one of the considerations for us is how do you complement domestic production and are we the right people to complement domestic production? We have iron import product and that's what the study is about. The other thing in addition to that, which is secondary, is we do have good land buffer zones around that around Munster.

So that's sort of a subset of the study. The magic component is what do we want our footprint to look like in terms of product offering And the volume of that offering, as you say, and the product mix of that offering over the next couple of years. So we'll have that work done Largely in the course of this year, That's great. Thanks very much, Mike. Appreciate it.

Thank you. And as a reminder, if you'd like to ask [indiscernible] Our next question comes from Daniel Kang with CLSA. Please go ahead.

Good morning, everyone.

Just I guess in your outlook statement, you talked about pricing and cost discipline. Can you talk about some of the initiatives that you're put through so far this year So there's a few things. I think you'll see that, and it's referenced in our presentation. That we are rebuilding margin And if you go back and look through the cycle, Yes, that margin, that EBITDA margin came off the last couple of years and we've been using the last period of time to rebuild that And you rebuild it through different lenses. 1 is through price, that's one thing. The second thing that we have been having to manage as has the industry has been and that started really in [indiscernible] And the input costs whether it's wages, transport costs, other associated labor costs or energy And I think for us, what we're seeing and what we're talking about is that we are seeing a leveling off of those rather large percentage increases that have occurred over the last few years. So the key thing is there's a leveling off component. We're also doing is we're trying to actually increase our intensity of production relative to energy usage. So we have initiatives underway for that.

And we're also looking at the substitution thereof of energy that we pay for. So it's a broad range. We do have some elevated costs this year compared to last year in corporate but they're really associated with catching up with some historical underinvestment in areas such as [indiscernible] and associated costs in that area. As well as in a good way a greater provision this year for paying bonuses to staff that have [indiscernible] lower over the last couple of years. So yes, so it's not a there's no silver bullet answer your question. It's around price discipline, which is actually discipline in the market. Around your product Our products are in high demand. As are competition, I'm sure. Our products are in high demand. So making sure that you maximize the value for your product And there's no particular silver bullet, as I say, around cost management other than decentralization of the business empowerment of the business, cost management sitting with the people making the decisions, accountability for making those decisions, but also more broadly seeking to reduce our dependency on things like energy And then that's probably the one area that I'm not as comfortable with, but thank you.

Good question.

And Mark, is there a normalized level EBITDA margin level that You think that business should be striving for or targeting?

Well, the answer is that the market has changed relative from 2019 2020. There's structural changes in our industry. So there's structural changes in terms of let's call it competition in 2019 2020 that that's in place now that we didn't have as much in some of our markets back in 20 19, 2020. On the flip side, what we are seeing is that, our product type is changing. I think we are close to one of the the leaders in Australia for this for generally speaking a low embodied carbon yes, cement and cement type So we think that gives us a positioning opportunity in terms of pricing. So it's interesting that an industry that you would think is a traditional industry has undergone fairly significant Macroeconomic changes in the last 4 or 5 years And I think we're just more robustly able to be positioned for that.

As the way we run the business, because of our product mix, and how and our portfolio of assets. So to answer your question, I won't give a guide on the margin. But certainly our aspirations are for that margin As we talked about on a forward outlook basis, we talk about maintaining margin and price going forward.

If I can just squeeze one last one in terms of the scheme of arrangement with CRH and Barrow.

You anticipate any issues from third or shareholder approval?

So there's a few things. In terms of the let's call it the regulatory approval process, that's something that the that the bidder is looking after And you're right. Yes, our role is to work with the investors for our investors support and vote for the resolution. So on that second point, we're about to engage an independent expert And our board has given a clear indication about what they think that this is a compelling transaction. I mean, [indiscernible] to the prevailing 30 day VWAP prior to the announcement. So that's compelling. And I think we've said we'll support it because we believe it's in the the best interest of shareholders So I think that's what we we would hope to independent expert that they arrive to that effect. And I think we think the shareholders will then support it. But that is our job to do that. Convince the shareholders to do so. [indiscernible] And this concludes our question and answer session. Like to turn the conference back over to Mark Irwin for closing remarks.

Okay. No, thank you. I'd like to thank everyone today for 2023 full year results presentation and and for your interest in the company. As you can say, we feel that we have that the organization has delivered significant revenue and earnings growth that's driven by pricing and cost discipline, We are reshaping our business to deliver value with a true focus on cost management and best in class customer service. So thank you for your time today.

Thank you. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Your participation in the conference has been terminated by the host.